Environmental and population externalities

In this paper, we investigate the external effects of the parent's de-cisions on the number of newly born children and the firm's decisions on theamount of polluting emissions that occur in industrial production. We employan optimal control model which comprises three stock variables representing population, the economic capital stock and the pollutant immissions in the naturalenvironment. We distinguish two different types of households, in which the de-cision on the number of births takes place. These two types may be regardedas two extremes: dynastic households, in which the family sticks together foreverand micro-households, in which children leave their parent's household immedi-ately after birth. We conclude that in both cases the decentralized outcome is notoptimal due to two externalities: one occurs in the individual decision on pollutingemissions, the other one in the individual decision on the number of births.It turns out that whereas the environmental externality is of the same form inboth cases, the type of external effect from the household's decision on fertilityis qualitatively different. The different types of population externalities requiredifferent policy instruments in order to internalize them. We discuss a Pigouviantax on emissions as well as taxes on population: if an appropriate tax on thehousehold size is applied in the case of dynastic households and an appropriatetax on children is applied in the case of small households a first best developmentof the economy is obtained....