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Effects on growth of environmental policy in a small open economy

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  • George Adu

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Abstract

This paper examines the effect of environmental policy on economic growth in a small open economy in a neoclassical framework with pollution as an argument in both the utility and production functions. We show that environmental policy imposes a drag on long-run growth in both the open and closed economy cases. The effect of environmental policy on growth is stronger in the open economy case relative to the closed economy model if the country has strong aversion to pollution and thus serves as a net exporter of capital in the international capital market. On the other hand, if the agents in the economy have low aversion to pollution and thus import capital, the effect of environmental care on growth is stronger in the closed economy relative to the open economy. Thus, from our setup, environmental policy is harmful to growth but environmental sustainability need not be incompatible with continued economic growth. Copyright Springer Japan 2013

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  • George Adu, 2013. "Effects on growth of environmental policy in a small open economy," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 15(4), pages 343-365, October.
  • Handle: RePEc:spr:envpol:v:15:y:2013:i:4:p:343-365 DOI: 10.1007/s10018-013-0065-7
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    Cited by:

    1. repec:spr:endesu:v:19:y:2017:i:4:d:10.1007_s10668-016-9790-y is not listed on IDEAS
    2. Wei-Bin Zhang, 2014. "Global Economic Growth and Environmental Change," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 64(3), pages 3-29, July-Sept.

    More about this item

    Keywords

    Economic growth; Optimal pollution growth; Capital–output ratio; Capital flight; Small open economy; O40; O41; Q56;

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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