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Green Policies and Public Finance in a Small Open Economy

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  • Bovenberg, A Lans
  • van der Ploeg, Frederick

Abstract

We explore the effects of greener preferences for the public finances, employment, and the domestic capital stock in a second-best framework. We find that greener preferences typically result in capital flight. Also, employment declines despite the factor substitution that is induced by a lower tax on labor and a higher tax on natural resources. If the uncompensated wage elasticity of labor supply is positive, private utility declines. Public consumption, in contrast, may rise if most of the improvement in environmental quality occurs through a lower level rather than a cleaner composition of economic activity. However, if the labor supply curve bends backwards, private utility rises while public consumption falls. Copyright 1994 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Bovenberg, A Lans & van der Ploeg, Frederick, 1994. " Green Policies and Public Finance in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(3), pages 343-363.
  • Handle: RePEc:bla:scandj:v:96:y:1994:i:3:p:343-63
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