encompass cases of economies that differ for a wide range of economic, social and political fac-
tors while having the same level of per capita income.
3. Environmental protection policy, redistribution and growth
There is little doubt that non-economic vari- ables such as the features of the political system
or some cultural values play an important role in the
implementation of
environmental-friendly policies Ng and Wang, 1993; Antle and Heide-
brink, 1995; Baldwin, 1995; Hettige et al., 1996. For instance, diffused property rights, a demo-
cratic voting system and respect of basic human rights, may facilitate the implementation of regu-
lation that protects the environment. In fact, there is wide consensus now that an understanding of
the nature of the interactions between the eco- nomic sphere and political sphere may shed light
on the actual determinants of policy decisions Alesina and Rodrik, 1994; Verdier, 1994. The
purpose of the analysis that follows is to model a situation in which moments of the income distri-
bution function other than its mean affect the level of pollution abatement expenditure. Let us
assume an additively separable utility function for individual l:
U
l
= c
l
+ g
l
Q 2
where c
l
is the level of consumption of a private good, environmental quality Q is a pure public
good and g
l
expresses the preference for environ- mental quality. The public good nature of envi-
ronmental amenities Q implies that environmental policy E is necessary to solve market failures, or
specifically Q = QE, where E is public expendi- ture for environmental care, and Q. \ 0. Envi-
ronmental care is financed through taxation, or E = Yt − t
2
2, where t is the environmental tax rate, t 0, 1, and Y is average income. Thus to
finance public policy for environmental care a fraction ty
l
of personal income y
l
is paid in taxes. The functional form for public environmental
protection E is quite general [see, for example, Bolton and Roland 1996]. The quadratic term in
the tax rate multiplied by per capita income de- notes the cost of public funds.
Individuals are heterogeneous. They differ by personal income levels. In this economy income is
distributed according to a unimodal function hy
l
, where y
l
[0, y
H
] and y
H
is the maximum level of personal income. Income inequality im-
plies that the majority of the population has income below the average so that we can assume
y
m
Y B 1, where y
m
is the median income of the distribution hy
l
. Furthermore, individuals have different preferences over conflicting goals, say
consumption of the private good c and consump- tion of the public good environmental amenities.
Central to the analysis that follows is the as- sumption that preferences for the public good Q
are positively correlated with the individual rela- tive income as expressed by the ratio R
l
= y
l
Y between personal income and average income. In
other words, the preference parameter g
l
in Eq. 2 is a function of the ‘distance’ between individual
l’s income and average income, g
l
= g R
l
, with g
l
. \ 0. In this way, the marginal rate of substi- tution between consumption goods and environ-
mental quality depends on the individual’s relative income. This ‘relative income effect’ states that
one’s subjective feeling of well-being is based more on relative income than on absolute income.
Ng and Wang 1993 have surveyed both the theoretical and empirical literature and show that
the evidence in support of this hypothesis is vast, particularly in high-income countries. Glazer and
Konrad 1996 further explore the relative income effect using a wealth-signalling model. The impli-
cation of this assumption is that poor people those whose income is below the average care
less for the environment than those relatively close to the average Y of the income distribution
Antle and Heidebrink, 1995; Broad, 1997. The relative income effect, as it pertains to environ-
mental policy decisions, is the fundamental hy- pothesis to be tested in the empirical investigation
of the next section.
In a static framework consumers and govern- ment will satisfy their budget constraint as equali-
ties. The indirect utility function for the individual l is thus:
V
l
= 1 − ty
l
+ g
l
[Yt − t
2
2] 3
Note that by Eq. 3 preferences are single-peaked in the environmental tax rate t, as each individual
has only one most preferred tax rate t
l
. Differen- tiation of Eq. 3 with respect to the choice vari-
able t leads to t
l
= 1 − 1g
l
R
l
. Furthermore, there exist, a monotonic relationship between ideal
policies and voters’ relative income. In fact, t
l
R
l
= − g
l
+ g
l
R
l
g
l 2
. Note that the optimal taxation rate for individual l is a monotonic func-
tion of relative income. In particular, t
l
R
l
\ 0 , if the income elasticity o
l
of the preference g
l
for environmental care is \ 1, or o
l
g
l
R
l
R
l
g
l
\ 1. Conversely for o
l
B 1, the op-
timal environmental tax is a decreasing function of relative income.
With a majority voting system the political arena will set the environmental tax at the level
that captures the majority’s support to its eco- nomic plan. The median voter theorem can be
applied to this case because voting takes place over a single issue t, preferences are single-
peaked with respect to the tax rate t and there exists a monotonic relationship between ideal poli-
cies and voters’ relative income Gans and Smart, 1996. Thus the politician maximizes the indirect
utility function of the median voter as expressed by Eq. 3 with l = m, where m is the index for the
median voter. The equilibrium tax rate t is the most preferred tax rate of the median voter:
t = 1 −
1 g
m
R 4
where R = y
m
Y is the ratio between the median income and the average income Y. By Eq. 4 the
equilibrium level of environmental abatement ex- penditure is an explicit function of the parameters
of the income distribution function:
E = EY, y
m
Y = Yt −
t
2
2 5
The optimal taxation rate responds to changes in income inequality. In fact:
t R
= − g
m
+ g
m
R g
m 2
6 where g
m
.
dg
m
dR is by assumption positive. From Eq. 5 I derive the following:
Proposition 1. Define R as the ratio between median and average income of the domestic in-
come distribution function, R = y
m
Y. Pro-envi- ronment public expenditure is an increasing
function of income equality R, or ER \ 0 , if the income elasticity o of the median voter’s
preference g
m
for environmental quality is greater than one, or o
g
m
RRg
m
\ 1 . Proof. See Appendix A.
In part the result illustrated with proposition 1 reproduces the characterization of the aggregate
demand and supply of environmental quality as often used to support the view that economic
growth poverty reduction and environmental quality go hand in hand Ruttan, 1971. As Antle
and Heidebrink 1995 explain, ‘if the income elasticity of demand for environmental quality or
amenities is high, then the increased prosperity engendered by economic growth could lead to
significantly higher demand for environmental quality.’ However, an important caveat here ap-
plies. The ‘relative income effect’ introduced in Eq. 2 by means of the parameter g requires us to
specify this elasticity condition in terms of a rela- tive income, such as y
m
Y, as opposed to an absolute one. The relative income effect shows
how economic development can impact upon envi- ronmental quality through quite distinct processes.
3
.
1
. En6ironmental protection policy and income inequality
Economic growth has an effect on environmen- tal care through two channels. Firstly, it involves
growth of the average income Y, which positively impacts upon abatement expenditure E. Secondly,
it affects the optimal environmental tax rate through its effect on income inequality as ex-
pressed by the ratio between median income and average income R. The model in the previous
section has shown that whenever political power is evenly distributed in the national community and
a democratic voting system is in place the prefer- ences of the median voter will be pivotal to deci-
sions involving environmental policies. If there
is a ‘relative income effect’ on individual consump- tion decisions as in Hirsch 1976 or more recently
in Ng and Wang 1993 and Glazer and Konrad 1996, the median’ voter preferences will depend
on her relative income, an indicator of her relative social position. In other words we can think of the
private good as a ‘positional good’ in Hirsch 1976 terminology insofar as individual satisfaction does
not depend on its absolute level of consumption, but on the relative social status generated by it. If the
income elasticity condition holds, proposition 1 has shown that the optimal taxation rate Eq. 4 is a
monotonic function of the median voter’s relative income. The larger income inequality, the lower the
relative income of the median voter, and the more he will be willing to spend in consumption of the
private good rather than financing public environ- mental expenditure for enjoyment of the pure public
good ‘environmental amenities’. Owing to the con- cern about relative standing, people tend to over-in-
vest in private goods c Frank, 1989.
Using Eq. 5: dEY, R
dY =
E Y
+ E
t t
R R
Y 7
Expression Eq. 7 introduces a disaggregation of the demand for environmental policy into a compo-
nent that depends on the economy’s capacity to pay EY and another that depends on its willing-
ness to pay EttRRY. Note that in principle there is no guarantee that the demand for
pollution abatement will increase during the process of development since the second term in Eq. 7 may
be negative and large in size. Thus:
Proposition 2. Assume that proposition 1 is satisfied. Sufficient condition for pollution abate-
ment EY, R to positively respond to growth in per capita income is that economic inequality
decreases when average income rises. Proof. See Appendix A.
If we now decompose actual pollution m drop- ping for convenience subscripts i and t into its
incipient component IY and pollution abatement EY, t, m = IY − EY, t, the effect of economic
growth an increase in per capita income Y on pollution emission is:
m Y
= dI
dY −
E Y
− E
t t
R R
Y 8
Eq. 8 introduces an interesting specification to the claim that economic growth leads to improvement
in environmental quality. In fact the following remark holds:
Proposition 3. Assume that the ‘income’ elasticity of the preferences for environmental amenities is
greater than one as in proposition 1. If [IY − EY] \ 0 , then, economic growth will lead to
a reduction in pollution emission if and only if economic growth leads to a sensible reduction in
income inequality or RY \ [IY − E Y][EttR]
− 1
\ 0 . Under the same
assumption, if [IY − EY] B 0 , economic growth will lead to a reduction in pollution emission
if and only if the effect of economic growth on income inequality is not too large, or
RYB [IY−EY][EttR]
− 1
. Proof. See Appendix A.
If relative income effects are relevant for individ- uals’ preferences, whether economic growth eventu-
ally decreases pollution emissions also depends on whether economic growth is accompanied by a
reduction in income inequality. A large income elasticity of the demand for environmental quality
is not necessary nor sufficient to guarantee a decline in environmental damage as an economy grows. If
RY is negative and large in size, economic growth may depress the demand for environmental
care even if it is relative-income elastic. While growth in per capita income may increase the
capacity to pay for environmental amenities, in- come inequality may drastically reduce voters’
willingness to pay. The net effect of economic growth on pollution abatement is unspecified, intro-
ducing an important element of uncertainty on the effect of economic growth on pollution emissions.
2
2
Interestingly, expression 8 establishes a link between the Environmental Kuznets Curve and the traditional Kuznets
Curve Kuznets, 1955 that goes beyond a purely formal analogy of the two inverted U-shaped relationships. See Tor-
ras and Boyce 1998 for an interesting empirical analysis of the environmental impact of income and power inequality.
Eq. 5 is a reduced form specification for pub- lic environmental expenditure suitable for testing
the hypothesis that other moments of the income distribution function besides its mean may be
relevant to explain the relationship between public environmental care and economic growth in high
income countries. In the next section I explore this hypothesis empirically by investigating the
impact of income inequality upon environmental expenditure in economically advanced societies.
4. Environmental protection policy and income distribution: An empirical investigation
