SHORT-LIVED AGENTS AND THE LONG-LIVED ENVIRONMENT

Actions that affect environmental quality both influence and respond to macroeconomic variables. Furthermore, many environmental and macroeconomic consequences of current actions will have uncompensated effects that outlive the actors. This paper presents an overlapping-generations model of environmental externalities and capital accumulation. Policies pursued by short-lived governments that affect capital accumulation and environmental quality, although myopically optimal, fail to internalize the long-lived external effects of their constituents' actions. Consequently, tax policies must be set by a long-lived government agency whose planning horizon is the environment's, not the individual agent's, lifetime.