Pollution effects on consumption demand and fertility: Reconciling environmental and demographic policies

We reconsider the pollution-fertility interplay in light of the e§ect of pollution on the marginal utility of consumption in a simple overlapping generations economy. Each household lives two periods. During the youth, the agent divides her time between work and raising children. Income from work is saved and consumed in retirement. The old are also exposed to a pollution externality generated by production activities. The state finances pollution abatement expenditures through a proportional tax levied on production. Notable results emerge, both in the short and long run. In the long run, a higher green-tax rate decreases (increases) the population size when household environmental concerns are low (high). Surprisingly, in the case of higher environmental concern, as the data show, environmental policy can help counter the demographic decline being experienced, notably, by the European Union. In the short run, endogenous áuctuations can arise around the unique steady state when pollution increases the marginal utility of consumption (the so-called compensation effect). More precisely, a persistent twoperiod cycle can emerge through a flip bifurcation, or a limit cycle through a Neimark-Sacker bifurcation. Interestingly, the equilibrium becomes locally indeterminate in the vicinity of the limit cycle, which promotes selffulfflling expectations and greater macroeconomic instability.