Pollution Externalities in a Model of Endogenous Fertility and Growth

An endogenous growth model with human capital formation, pollution caused by production of consumption goods, and endogenous fertility decisions made by altruistic agents with infinite horizons is presented. Consequences for optimal policy of modelling fertility as an explicit decision variable are examined. Because ordinary lump-sum transfers to individuals are no longer neutral, either revenue from a pollution tax must be redistributed to dynasties (working as an implicit tax on child births), or lump-sum transfers must be supplemented with an explicit fertility tax. Alternatively, the government can avoid distortions of the fertility decisions by maintaining an appropriate public debt. When abatement is highly productive, it can be optimal to subsidize fertility in order to increase total production.