The Political Economy of Environmental Policy with Overlapping Generations

Abstract

A two-sector OLG model illuminates the inter-generational effects 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 from the tax-induced improvement in environmental stock. The principal inter-generational 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.

Keywords: open-access resource, two-sector overlapping generations, resource tax, generational conflict, environmental policy, dynamic bargaining, Markov perfection

JEL Classification: E24, H23, Q20, Q52, Q54