PUBLIC CONSUMER-GOODS, OUTPUT-GENERATED VARIABLE RETURNS, AND LABOR SUPPLY

This paper develops a simple general-equilibrium model of a closed eco nomy. The economy under consideration produces two final goods, one pr ivate and one public, which are both produced with labor and an interm ediate good under constant returns to scale. The intermediate good is produced by labor alone, and its production is subject to output-gener ated variable returns to scale. The public good can be interpreted as government spending on environmental quality, police protection, cultu ral activities, and publicly funded health care. The model is used to examine the impact of an exogenous change in labor supply on the size of the government, relative prices, and welfare. Within the context of the present study, an increase in labor supply can be attributed to e ither exogenous immigration or population growth. The model is also us ed to examine the relationship between the size of the country and the pattern of trade.