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We develop a theory of second best policy myopia. Policy myopia arises when rational voters allow politicians to bias public investments towards short-term investments. We demonstrate that policy myopia is not an inevitable implication of the fact that voters cannot observe immediately how much their politicians invested in certain types of public goods; rather it is the interaction between observation lags, economic growth and binding revenue constraints that forces rational voters to accept a short-term bias. We argue that growth in government eventually leads to policy myopia. [Copyright 2007 Elsevier B.V.]

In the past 15 years, incentive-based environmental policy instruments, such as pollution taxes and tradeable pollution permits, have become an important supplement to tradition command-and-control instruments in Europe and the U.S. This paper proposes a positive theory of environmental instrument choice that can be used to explain this trend. We imagine a democratic society that seeks to lower the level of pollution from industrial production to a pre-specified target. The target can be implemented by one of three instruments: [Q]: quantity controls; [P]: tradeable permits; and [T]: pollution taxes. We characterize political equilibrium as an evolving policy compromise between special-interests, representing polluters, and the electorate. We identify three factors that play a key role in explaining the recent trend in instrument choice: increasingly ambitious environmental targets, learning-by-doing driven reductions in transaction costs associated with permit trading, and (abatement) cost-reducing technological progress.

We evaluate the long-run distributional effects of cuts in the public expenditure on education. The article simulates a dynamic model of the earnings distribution. Earnings of individuals differ because of differences in innate ability, and additionally if their education levels differ. We model a dual system of education as in the UK or US, where the state finances public education by taxation. Parents may choose to educate their children privately by spending more. Using parameter values estimated by other researchers for the UK, we evaluate the likely long-run impact of changes to education expenditures. These estimates suggest that the long-run impact of modest changes to public education expenditures on the inequality of earnings are likely to be substantial.

Traditional macroeconomic models are based on the concept of a single representative consumer. A great deal can be gained by constructing a dynamic general equilibrium economic model which represents the behaviour of a panel of consumers spread out along the income distribution. Such a framework allows us to assess the distributional impact of policy changes. We present here such a model, showing the behaviour of consumers facing uncertain incomes and we use it to assess the distributional impact of changes to pension provision. We find that means testing of old age pensions increases inequality among the retired because of the effect it has on incentives to save.