PUB - Publikationen an der Universität Bielefeld

This paper considers first best allocations in an economy where a consumption good is produced using labor. Production results in pollution, which is a public bad. Pollution abatement can be achiedved either by restricting poduction output or by using labor. We consider how the first best allocation varies with polulation size. consumers are unambiguously worse off when the population is larger. However, surprisingly, there is no single optimal policy on how pollution and labor should vary with population size. For standard models of preferences and technology it might be desirable either to increase or to reduce emissions and/or labor, depending on parameters. Despite such ambiguity in the first best level of emissions, the Pigouvian tax wihich implements the first best is a non-decreasing function of the population size. We conclude that, since the comparative statics of the first best are so ambiguous, sensible debate on environmental policy cannot proceed without a careful determination of actual preferences and technology.