Pareto-improving environmental policies in an overlapping-generations model

This paper develops an overlapping-generations model with environmental externalities. In particular, we consider a situation where future generations are made worse off because of environmental degradation caused by the consumption of past generations. We show that there exists an allocation for which the welfare of both current and future generations is strictly increased, relative to a laissez-faire competitive equilibrium allocation. We then demonstrate that this allocation can be achieved by a tax-transfer scheme.