Protecting the environment: On the interplay between voluntary contributions and public policy

We study the interplay between individuals’ voluntary contributions to environmental protection and public environmental policy in a dynamic general-equilibrium model. To capture the observed discrepancy between the willingness of individuals to contribute privately versus publicly to environmental protection, we treat the quality of the environment as a public good and assume that voluntary contributions are motivated by a ‘warm glow’ of giving. We show that in the laissez-faire scenario without government intervention, the strength of warm glow negatively affects aggregate output and positively affects environmental quality in the long run. However, when the government intervenes and decides on environmental policy in the interests of individuals, the warm-glow strength has a negative long-run effect on both variables. Thus, our results suggest that advocating for private actions to ensure a better environment in the future may be counterproductive in the presence of public environmental policies.