Resolving Intergenerational Conflict Over the Environment Under the Pareto Criterion
38 Pages Posted: 12 Oct 2016
Date Written: August 17, 2016
We describe a “business as usual” (BAU) economy in which pollution is a by-product of productive activity by the current generation but “damages” production for future generations. Over time, conditions in the BAU economy become dire: it gets increasingly polluted, consumption falls and generational welfare levels decline. A government introduces costly pollution abatement and finances it via distorting taxes and borrowing on perfect international markets. Pollution levels start to decline, generating downstream welfare gains, some of which the government taxes away, without hurting anyone, to help pay off the debt, that too, in finite time. Along the transition, every generation faces less pollution, consumes more and is happier than if life had continued in the BAU world.
Keywords: pollution, abatement, debt, environmental policy, Pareto criterion
JEL Classification: O440, Q560, H500
Suggested Citation: Suggested Citation