Environmental tax policy, habit formation and nonlinear dynamics

Hung Ju Chen*, Ming-Chia Li

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations


In this paper, we study the impact of environmental tax policy on the dynamic property in an environment-growth model (John and Pecchenino 1994) [3]. We assume that the government levies consumption tax and uses the tax revenue to improve environmental quality. We show that the economic dynamics can be represented by a first-order difference equation in environmental quality when there is no habit formation of environmental quality. If agents have habit formation of environmental quality, the economic dynamics will be represented by a second-order difference equation in environmental quality. In both cases, chaotic and cyclical fluctuations may exist if agents' preference towards environmental quality, the maintenance efficiency relative to degradation and the tax rate are sufficiently low. However, the economy undergoes transformation from complex dynamics to simple dynamics as the tax rate increases. Furthermore, in the presence of habit formation of environmental quality, an increase in the degree of habit formation lowers the possibility of complex dynamics.

Original languageEnglish
Pages (from-to)246-253
Number of pages8
JournalNonlinear Analysis: Real World Applications
Issue number1
StatePublished - 1 Feb 2011


  • Bifurcation
  • Chaos
  • Entropic chaos
  • Environmental quality
  • Habit formation
  • Multidimensional perturbation
  • Topological entropy

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