Private Externalities and Environmental Public Goods: Politico-economic Consequences
We study an overlapping-generations model with private externalities on a public good (e.g. the environment). Emergent politico-economic equilibria, depending on model primitives (e.g. the degree of externality), imply that average income and environmental outcomes may be related positively or negatively, or not at all. Qualitatively, these equilibria provide a cross-country interpretation for existing disagreements in empirical findings on average income and environment. Normatively, inefficiently excessive environmental outcomes may emerge. These are partly explained by a politico-economic redistributive tension along a taxation Laffer curve. However, with externalities, this tension is further modified, resulting in these excesses being non-monotonic in the degree of externality.
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