Environmental Policy, Public Goods and the Marginal Cost of Public Funds
If private goods are perfect substitutes for public goods and environmental quality, greener preferences reduce employment, raise abatement, and improve environmental quality. If the elasticity of substitution between private goods and leisure exceeds one, the tax rate increases, thereby reducing private consumption. However, if labor supply bends backwards, private utility rises while the tax rate and public consumption fall. With imperfect substitution between private and public consumption, greener policies boost labor supply if the substitution elasticity between private and public consumption and the elasticity of the effectiveness of public abatement are small and the labor supply curve bends backwards. Copyright 1994 by Royal Economic Society.
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