Pollution, unequal lifetimes and fairness

• Pollution is a major cause of inequalities in longevity and well-being.
• This paper examines the compensation of pollution victims.
• We use a 2-period dynamic OLG model with pollution and capital accumulation.
• We compare the utilitarian and ex post egalitarian social optima.
• Decentralizing the ex post egalitarian optimum requires a higher capital income tax.

This paper characterizes the optimal level of pollution in a two-period OLG economy where pollution deteriorates survival conditions. We compare two long-run social optima: on the one hand, the average utilitarian optimum, where the long-run average well-being is maximized, and, on the other hand, the ex post egalitarian optimum, where the realized well-being of the worst-off at the stationary equilibrium is maximized. It is shown that the ex post egalitarian optimum involves, under weak conditions, a higher level of pollution in comparison with the utilitarian optimum. This result is robust to introducing health expenditures in the survival function. Finally, we examine the decentralization of those two social optima, and we compare the associated optimal taxes on capital income aimed at internalizing the pollution externality.