GREEN POLICIES AND PUBLIC-FINANCE IN A SMALL OPEN-ECONOMY

We explore the effects of greener preferences for the public finances, employment, and the domestic capital stock in a second-best framework . We find that greener preferences typically result in capital flight. Also, employment declines despite the factor substitution that is ind uced by a lower tax on labour and a higher tax on natural resources. I f the uncompensated wage elasticity of labour supply is positive, priv ate utility declines. Public consumption, in contrast, may rise if mos t of the improvement in environmental quality occurs through a lower l evel rather than a cleaner composition of economic activity. However, if the labour supply curve bends backwards, private utility rises whil e public consumption falls.