No abstract

This study examines the effect of pollution permits on economic growth and welfare using a research and development‐based model that measures social status by a person's wealth position in society. Under realistic parameter conditions, we find that a decrease in pollution permit levels leads to an increase in the economic growth rate and improves welfare in a high steady state via the marginal rate of substitution between wealth and consumption, which is influenced by the crowding out and resource reallocation effects. This channel depends on the presence of social status preference, and we refer to this as the substitution effect.

In this article, we investigate the effect of environmental policy on economic growth using an R&D-based growth model with endogenous labour supply. A government implements a pollution permit as environmental policy. As a result, we conduct a numerical analysis and find that a decrease in pollution permit levels positively effects economic growth.