Population Externalities and Optimal Social Policy

If fertility is not chosen in a socially optimal way, and if policies to directly target fertility are ineffective or politically infeasible, then public policies that affect fertility could have important welfare consequences through the fertility channel. We refer to these effects as population externalities, and in this paper we focus on one important variable that may have a causal impact on fertility: the education of potential parents. If increased education causes families to have fewer children, then a government would want to increase college tuition subsidies in the presence of environmental externalities such as climate change, to indirectly discourage families from having children who will generate future environmental costs. Alternatively, if fertility is inefficiently low, due to imperfect parental altruism for example, governments will want to lower tuition subsidies to encourage child-bearing. We present a simple model of the college enrollment decision and its fertility impacts, and show that such population externalities are quantitatively important: the optimal subsidy increases by about $5000 per year with climate change, and decreases by over $7000 per year with imperfect parental altruism. Our paper demonstrates how public economics can incorporate population externalities, and that such externalities can have significant impacts on optimal policy.