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Does a Tougher Environmental Policy Raise Unemployment? Optimal Taxation, Public Goods and Environmental Policy With Rationing of Labour Supply


  • Bovenberg, A Lans
  • van der Ploeg, Frederick


The implications of more environmental concern for the optimal provision of public goods, taxation, environmental policy and involuntary unemployment are derived within a second-best framework in which lump-sum taxes and subsidies are not available and labour supply is rationed due to a rigid consumer wage. In the absence of factor substitution more environmental concern raises involuntary unemployment. The shift from distortionary to non-distortionary taxation depresses the marginal cost of public funds, thereby creating more room for public spending. Nevertheless, public consumption may fall in order to make room for public abatement if the productivity of the latter tapers off slowly and if the profit tax rate is low. With factor substitution between labour and polluting resources, a shift towards greener preferences boosts employment if labour is a better substitute for polluting resources than the fixed factor, the profit tax is low, and the production share of the fixed factor is large. If initial environmental concern is small, public consumption may rise as well.

Suggested Citation

  • Bovenberg, A Lans & van der Ploeg, Frederick, 1993. "Does a Tougher Environmental Policy Raise Unemployment? Optimal Taxation, Public Goods and Environmental Policy With Rationing of Labour Supply," CEPR Discussion Papers 869, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:869

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    Cited by:

    1. Carraro, Carlo & Galeotti, Marzio & Gallo, Massimo, 1996. "Environmental taxation and unemployment: Some evidence on the 'double dividend hypothesis' in Europe," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 141-181, October.

    More about this item


    Emissions; Environmental Externality; Optimal Taxation; Public Abatement; Public Goods; Unemployment;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy


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