Is growth bad for the environment? Pollution, abatement and endogenous growth

Abstract

Recentiy, the importance of environmental and economic "win-win" situations has been stressed, indicating that care of the environment requires economic growth, while economic growth in turn cannot take place without taking proper care of the environment. We generalize a popular endogenous growth model with constant returns to scale in a broad measure of the capital stock, by making consumers care not only about current and future consumption levels, but also about the current and future quali'y of the environment, to see under what circumstances "win-win" situations can arise. The capital stock is decomposed into private capital and productive government spending. Production of goods and services causes pollution which is detrimental to the environment. The government can invest in abatement processes to clean up the environment and in productive government spending by taxing production (= income). There is, therefore, both an environmental externality and a public good, i.e. productive government spending. This brings us within the realms of second-best economics. We investigate the decentralized market economy as well as the command economy. Two approaches to model the environment can be distinguished in the literature: the stock approach and the flow approach. The flow approach assumes that the level of environmental quality changes instantaneously if the production level changes or if the level of abatement changes and is particularly relevant for analysing the environmental externality associated with noise. The stock approach, on the other hand, assumes that pollution and abatement indirectly influence the environment by affecting the rate of change of the environment over time and is more relevant for analyzing the problems of acid rain