The Political Economy of Environmental Policy with Overlapping Generations

Larry Karp, Armon Rezai

Publication: Scientific journalJournal articlepeer-review

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A two-sector overlapping generations model illuminates the intergenerational effects of a tax that protects an envi-
ronmental 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 from the tax-induced improvement in environmental stock. The
principal intergenerational conflict arising from the tax is between generations alive at the time society imposes the
policy, not between generations alive at different times. A Pareto-improving tax can be implemented under various
political economy settings.
Original languageEnglish
Pages (from-to)711 - 733
JournalInternational Economic Review
Issue number3
Publication statusPublished - 2014

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