Economic Growth, Pollution, and Renewable Resources

Abstract

This paper first analyzes a model of economic growth with stock pollution allowing smooth substitution between emissions and reproducible capital. When emissions are optimally controlled, the steady-state consumption is lower than without pollution control but the optimal steady-state equilibrium may not exist if the marginal productivity of capital is bounded. The steady state is shown to be a local saddle point independent of the rate of discount. If pollution is not controlled, a competitive economy moves along a stable growth path toward a too heavily polluted steady state. Next, a growth model in which pollution affects the growth of renewable resources is presented. The conditions for the existence and saddle point property of the steady state are given, and the consequences of nonoptimal externality taxes are discussed. When renewable resources are included, higher-than-optimal pollution may decrease steady state consumption, contrary to the case where renewable resources are ignored.