Effects of Environmental Regulation on Macroeconomic Performance and Welfare in a Small Open Economy

Young-Jae Kim and Taek-Dong Yeo
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Young-Jae Kim: Kyungil University
Taek-Dong Yeo: Yeungnam University

Korean Economic Review, 1999, vol. 15, 415-435

Abstract: This paper analyzes the effects of a stricter environmental policy on macroe-conomic performance and welfare in a two-sector intertemporal optimizing model. The direct application of pollution as a productive and flow argument to both the instantaneous utility function and production function is the main difference from the previous literature. Utilizing this model, we perform both long-run steady state and short-run transitional analysis as well as welfare analysis. In the long-run analysis, both capital stock and the amount of labor supply are lowered, but the consumptions of two goods are ambiguous. In the short-run transitional dynamics, the temporary policy shock results in permanent effects and the effects of anticipated policy change are dampened. The interesting outcome in the welfare analysis is that the stricter environmental policy may improve the agent's welfare, which is contrast to the generally accepted negative welfare effect in the previous works.

Keywords: Environmental Regulation; Capital Accumulation; Current Account; Welfare (search for similar items in EconPapers)
JEL-codes: F41 Q28 (search for similar items in EconPapers)
Date: 1999
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