Abstract
In many countries, the GDP share of the public sector increases with per capita income but happiness fails to register a long-term upward trend. Most objective indicators of the quality of life also do not correlate positively with income but improve with time associated with the advancement of knowledge at the world level. Taking account of the role of environmental quality and relative-income effects, it is shown that the optimal share of the public sector is likely to increase with economic growth, though happiness may or may not increase. Public spending may be underfunded due to the over-emphasis on private consumption and the global public good nature of environmental quality and fundamental research which are more welfare-improving than competitive private consumption.
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