Abstract
This paper investigates the impact of abatement policies on the environment and economic growth. Environmental damage is a by-product of industrial production. As pollution reduces the welfare of every individual, it constitutes a negative impact of production. We focus on abatement policies to regenerate the environment. In social optimum, we obtain a simple rule for abatement expenditures. However, this rule cannot be implemented easily in a competitive market equilibrium, where the amount of abatement activities has to be financed by distortionary taxation. Finally, we present empirical evidence based on factor shares, which indicates that the model is empirically reasonable.
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