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On Endogenous Growth: The Implications of Environmental Externalities


  • Elbasha, Elamin H.
  • Roe, Terry L.


This paper uses an endogenous growth model to examine the interaction between trade, economic growth, and the environment. We find that whether trade enhances or retards growth depends on the relation between factor intensities of exportable, importable, and R&D and the relative abundance of the factor R&D uses more intensively. Depending on the intertemporal elasticity of substitution, the long-run rate of economic growth changes with environmental externalities. Concerns about the environment can explain a significant part of cross-country difference in growth rates. For the empirically reported range of the elasticity of intertemporal substitution, countries which care more about the environment grow faster. The effects of trade on the environment and welfare depend on the elasticities of supply for the two traded goods, the terms of trade effect on growth, and pollution intensities. The decentralized and Pareto optimal growth rates are, in general, different. The market growth rate is bigger than the optimal rate the larger the degree of monopoly power in the innovation sector and the stronger the effects of environmental externalities. The policy implications of this divergence are discussed. We also consider numerical exercises to broaden the insights from the analytical results and allow for incorporating pollution abatement
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  • Elbasha, Elamin H. & Roe, Terry L., 1996. "On Endogenous Growth: The Implications of Environmental Externalities," Journal of Environmental Economics and Management, Elsevier, vol. 31(2), pages 240-268, September.
  • Handle: RePEc:eee:jeeman:v:31:y:1996:i:2:p:240-268

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    References listed on IDEAS

    1. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-930, July.
    2. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    3. Richard J. Gilbert & Michael H. Riordan, 1995. "Regulating Complementary Products: A Comparative Institutional Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 243-256, Summer.
    4. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-937, October.
    5. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    6. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General


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