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Abstract

Government spending has significant environmental implications. This paper analyzes the effect of the allocation of government spending between public goods broadly defined and private goods or non-social subsidies on air and water pollution. The theoretical model predicts that a reallocation of expenditures from private subsidies to public goods improves environmental quality by reducing production pollution. We estimate an empirical model that shows that such a reallocation causes a significant reduction in air pollutants namely sulfur dioxide and lead and an improvement in water quality measures including dissolved oxygen and biological oxygen demand.

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