Pollution Accumulation and Endogenous Growth in a Sustainable Equilibrium

This paper presents an endogenous growth model, with a feature of pollution accumulated affecting production efficiency and preference altogether. This model presents the links between pollution level, economic growth, government policy and preference toward pollution. With this model, the following three implications are derived: ( 1) As the government authority takes a tougher environmental measure, the pollution level, economic growth rate and R&D share in GNP for a less polluting energy source decrease. However, with this tougher policy, the optimal tax rate to finance environmental measures and pollution abatement spending share in GNP increase. ( 2) The countries with higher time preference rate show less pollution level, lower economic growth rate, higher abatement spending share and lower R&D spending share in income. (3) With a minimal use of calibration about the functions relating pollution and economic growth, I find that the relative shadow price of economic growth rate, with respect to one percent increase of pollution level accumulated, is very high over the broad range of parameter values.