Pollution, Unequal Lifetimes and Fairness

Pollution is a major cause of mortality, leading to substantial inequalities in lifetime well-being across individuals. This paper characterizes the optimal level of pollution in a two-period OLG economy where pollution deteriorates survival conditions. We compare two long-run social optima: on the one hand, the average utilitarian optimum, where the long-run average well-being is maximized, and, on the other hand, the ex post egalitarian optimum, where the well-being of the worst-o¤ at the stationary equilibrium is maximized. It is shown that the ex post egalitarian optimum involves a higher level of pollution in comparison with the utilitarian optimum. This result is robust to introducing health expenditures in the survival function. Finally, we examine the decentralization of those two social optima, and we compare the associated optimal taxes on capital income aimed at internalizing the pollution externality.