Non-Catastrophic Endogenous Growth with Pollution and Abatement

Abstract

When there are pollution externalities the competitive equilibrium is not Pareto-optimal nor environmentally sustainable even if abatement activities are endogenously decided. In this paper we introduce the possibility of an ecological catastrophe like the one predicted by the global climate change, imposing the constraint of an upper-limit to the pollutants stock. We characterize the socially optimal solution and study conditions for the sustainability of the balanced growth path. We find a trade-off between environmental quality and growth. The rate of growth depends negatively on the weight of environmental care in the utility function and positively on the population growth rate. We show that the emissions reduction recommended in the Kioto protocol is an appropriate policy to avoid the ecological catastrophe and ensure global efficiency and positive long-run growth.Environment, Externalities, Optimal Growth, Ecological Catastrophe, Sustainability.