Endogenous technology and environmental quality in economic models

Abstract

The debate on the relationship between the economy and the environment focuses on the question whether there is a trade-off between economic growth and environmental quality. In order to enable a quantification of this essentially empirical question, it is necessary to integrate the environment into economic models. This article considers the integration of the environment in models of economic growth. According to these models, technical progress constitutes a major driving force for economic growth. First, we give a short survey of the theory of endogenous growth, where, unlike in traditional growth theory, the pace of economic growth may depend on economies of scale in the production process. Furthermore, it is discussed how the concept of sustainable development can be made operational within the framework of models of economic growth. Next, we give an example of both a theoretical model of endogenous growth which integrates the environment, and of an empirical model based on the theory of economic growth. Finally, mechanisms of structural change are described that may be exploited by policy makers in order to enhance environmental quality in a growing economy.