Environmental Policy in an Endogenous Growth Model with Expanding Variety

Abstract

In this paper, we analyze the long-term impact of an environmental policy on economic growth, pollution and welfare. A standard growth model with horizontal innovation is modified by including pollution which comes from the use of intermediate goods production. Taxation on pollution reduces profits of final good producer as well as intermediate good producers. In this setting, profit gains is explained by a realloaction of labor from intermediate goods sector to R&D sector which enhances innovation, growth and welfare while it reduces pollution.

Carbon Emission and Endogenous Growth Between Two Economic Systems

“…The focus of some studies is on finding the optimal extraction and growth rates when considering the pollution problem (Michel and Rotillon, 1995;Withagen, 1995;Byrne, 1997;Reis, 2001;Dietz and Stern, 2015;Kollenbach, 2015;Aznar-Márquez and Ruiz-Tamarit, 2016). Other scholars focus far more on the policy effects in an endogenous growth model of pollution (Bovenberg and Smulders, 1996;Jones and Manuelli, 2001;Greiner, 2005;Chu and Lai, 2014;Afonso and Afonso, 2015;Lorente and Álvarez-Herranz, 2016;Bianco, 2017;Marsiglio, 2017). Although there are many scholars who have explored economic growth and carbon emissions, none of them considers the possibility of the interaction of polluting activities between the two economic systems, which is especially important when facing the problems of global pollution.…”