International and Intergenerational Environmental Externalities

Abstract

We examine a world in which policymakers' actions in a given country at a given time have long‐lived effects on a common resource: the global environment. We consider the first best in which long‐lived planners behave cooperatively, then examine the allocation of resources when there is non‐cooperation across countries, across time, or both. Finally we analyze the dynamic behavior of the economy along balanced growth paths. It is found that while long‐lived international institutions are necessary to internalize all externalities, cooperation at a point in time may be harmful to future generations.