Transitional Impacts of Environmental Policy in an Endogenous Growth Model

Abstract

To explore the link between a tighter environmental policy and economic growth, the authors employ an endogenous growth model with endogenous technological progress in abatement technologies. The environment, which is modelled as a renewable resource, acts both as a public consumption good and as a public input into production. The entire transition towards a new balanced-growth path after a tightening of environmental policy is computed analytically. The authors find sharp contrasts between short-run and long-run effects. Whereas the level and the growth rate of output may decline in the short run, income growth may improve in the long run. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.