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The Political economy of environmental policy with overlapping generations

  • Author(s): Karp, Larry
  • Rezai, Amon
  • et al.
Abstract

A two-sector OLG model illuminates previously unexamined intergenerationaleffects of a tax that protects an environmental stock. A traded asset capitalizes the economic returns to future tax-induced environmental improvements, benefiting the current asset owners, the old generation. Absent a transfer, the tax harms the young generation by decreasing their real wage. Future generations benefit fromthe tax-induced improvement in environmental stock. The principalintergenerational conflict arising from public policy is between generationsalive at the time society imposes the policy, not between generations alive at different times. A Pareto-improving policy can be implemented under various political economy settings.

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