Optimal taxation, public goods and environmental policy with involuntary unemployment

Abstract

The implications of more environmental concern for the optimal provision of public goods, tax structure, and involuntary unemployment are derived within a second-best framework in which lump-sum taxes are not available and labour supply is rationed owing to a rigid consumer wage. A shift towards greener preferences may boost employment and public consumption if initial environmental concern is small, a fixed factor plays a major role in production, and pollution is reduced through more labour-intensive production rather than a lower level of output.