Overlapping Generations and Environmental Control

This paper sets forth a continuous-time OLG model in order to analyze intertemporal trade-offs in the use of environmental resources. This theoretical framework proves to be particularly appropriate in examining the externalities arising from consumer heterogeneity and disconnectedness across generations. We characterize the trade-off between capital accumulation and the environment and derive the conditions for an optimal fiscal policy. The role of government intervention is twofold. First, it has to achieve intergenerational equity, compatibly with a time-consistent social welfare criterion. Second, it has to correct the intertemporal market failures due to the selfish behavior of each generation.