Environmental Policy in a Two Sector Growth Model

Frank Hettich and Minna Selene Svane

No 98-04, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper analyses policy measures within a two sector endogenously growing economy with pollution. Pollution is either generated by production or by the use of physical capital in production, and can be reduced by public abatement activities. In this generalized Uzawa--Lucas model, the effects of fiscal policy are derived for all core variables and ratios. In addition, the optimal taxation rules are derived. If a pollution tax is not available it turns out that a first best solution may be reached by use of factor income taxation. Additionally, the effects and the possibility of environmental policy are complemented for a small open economy.

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