Environmental Tax Policy, Habit Persistence and Complex Dynamics

In this paper, we consider habit formation of environmental quality and en-vironmental tax policy in an environment-growth model: the John-Pecchenino (1994) model. We show that the economic transition can be represented by a difference equation of order one or two, depending on no habit formation or persistent habits of environmental quality. In both cases (without and with persistent habits of environmental quality), we show that entropic chaos might present under certain conditions and the economy moves from complex dynamics to simple dynamics as the tax rate increases. This result implies that environmental tax policy is a useful tool to affect the complexity of the dynamic behavior of an economy. Furthermore, in the presence of habit for-mation of environmental quality, an increase in the degree of habit persistence lowers the possibility of complex dynamics