Health, infrastructure, environment and endogenous growth

Abstract

This paper attempts to develop a model of endogenous growth with special focus on the role of health capital, public infrastructure and environmental pollution. It is an extension of the model of Agenor (2008) who does not consider environmental pollution. We analyze properties of optimal fiscal policy in the steady-state growth equilibrium when the level of production of the final good is the source of pollution. Tax revenue of the government is channelized into three expenditure heads-health expenditure, pollution abatement expenditure and public infrastructure expenditure. It is found that the optimum ratio of public infrastructural expenditure to national income in the balanced growth equilibrium is less than the competitive output share of the public input; and it varies inversely with the magnitude of the emission-output coefficient. There is no conflict between the social welfare maximizing solution and the growth rate maximizing solution in the balanced growth equilibrium. There may exist indeterminacy in the transitional growth path converging to the unique steady-state equilibrium point that never satisfies saddle-point stability. The market economy growth rate is not necessarily less than the socially efficient growth rate; and the relationship between these two depends on the magnitude of the emission-output coefficient.