Pollution Externality, Endogenous Labor Supply and Environmental Policy Choice

Abstract

By developing an endogenous growth model on the base of Lucas (1988) embodying the endogenous labor supply and pollution externality, this paper aims to examine the interaction between negative pollution externalities, endogenous leisure- labor choice, human capital investment and sustainable development. Within this framework, we first study the optimum in the planned economy and derive the conditions under which the sustainable growth path is both feasible and optimal. Furthermore, we show that an increase in the productivity of human capital sector, in the abatement expenditure elasticity of pollution damage reduction and in environment consciousness will stimulate the long-run growth rate. But a rise in leisure consciousness and in the output elasticity of pollution damage incremental will lower the long-run growth rate. Finally, it is also revealed in our model that a government could intervene and bring the market economy onto a sustainable and optimal growth path through conducting public abatement policies or levying Pigouvian taxes.