FISCAL AND ENVIRONMENTAL-POLICY UNDER MONOPOLISTIC COMPETITION

Keynesian demand management offsets some of the distortions caused by monopolistic competition and thus induces multiplier effects on nation al income and environmental damages. The cost of public funds rises wi th the virtual environmental tax and the degree of competition in the product market. The virtual environmental tax rises with abatement and falls with the cost of public funds. Consequently, greener preference s induce a rise in the virtual environmental tax, the cost of public f unds and public abatement, and a fall in the provision of traditional public goods. A greater preference for traditional public goods harms environmental quality, since both abatement and output fall. Protectin g cartels lowers the cost of public funds and may raise the provision of both traditional public goods and abatement. Environmental quality may thus rise, but other components of social welfare will fall. The p aper also analyses the effects of private abatement, pollution taxes, fiscal consolidation and the progressivity of the tax system on govern ment policy, employment, environmental quality and welfare