Optimal Public Policy in a Schumpeterian Model of Endogenous Growth with Environmental Pollution

Meeta Mehra () and Sujata Basu ()

No 1204, Competence Centre on Money, Trade, Finance and Development from Hochschule fuer Technik und Wirtschaft, Berlin

Abstract: The paper utilizes a model of endogenous growth with vertical innovation (´a la Aghion-Howitt) to examine how the inclusion of a production related pollution externality affects the prospect for long-run growth of a closed economy. It is derived that the social optimum exhibits the possibility of long-run sustainable growth, such that consumption, capital stock and output grow without bound, knowledge also grows in an unbounded fashion, and both – the intensity and stock of pollution – fall. In comparison, at the unregulated market equilibrium, a clear conflict arises between sustaining economic growth and environment protection, as growing pollution stock ceases the opportunity for long run growth in output, capital stock and consumption. Finally, in deriving the optimal public policy tool-kit, given the distortions in the unregulated market economy, it is shown that a positive and growing rate of tax on pollution, an ad valorem subsidy on capital and a positive R and D subsidy would implement the socially desirable outcome. However, a theoretical possibility of an optimal tax on R and D cannot be ruled out in an exceptional situation of too low a productivity of the R and D sector.

Keywords: working paper; daadpartnership; finance-and-trade (search for similar items in EconPapers)
JEL-codes: O10 O11 O13 Q28 Q55 Q56 Q58 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-06
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Published in Berlin Working Papers on Money, Finance, Trade and Development, June 2012

Downloads: (external link)
http://finance-and-trade.htw-berlin.de/fileadmin/H ... owth-Environment.pdf First version, 2012 (application/pdf)

Related works:
Journal Article: Optimal Public Policy in a Schumpeterian Model of Endogenous Growth with Environmental Pollution (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mtf:wpaper:1204

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