Environmental Dynamics in an Integrated Walrasian-General Equilibrium and Neoclassical-Growth Theory

This study deals with interactions of economic growth and environmental change with heterogeneous households. The analytical framework is built by integrating the three important theories in economics - the Walrasian general equilibrium theory, the neoclassical growth theory, and the neoclassical growth model with endogenous environment. The three theories are integrated by applying Zhang's approach to household behavior. The economic system consists of one capital goods sector, one consumer goods sector, one environmental sector, and any number (of types) of households. The motion is described by a set of differential equations. For illustration, we simulated the motion of the economic system with three groups. The comparative analyses provide some insights into the complexity of economic growth with environment. For instance, the study by Grossman and Krueger (1995, p. 353) identifies no evidence that "environmental quality deteriorates steadily with economic growth." Our simulation indicates that although the conclusion made by Crossman and Krueger holds for the national economy, but is invalid for a certain group.