Pollution Externalities in a Schumpeterian Growth Model

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10055.pdf Non-Technical-SummaryGlobal warming, the pollution of the seas or a continuously increasing noise level are just a few examples of environmental issues that have alerted the global public in recent years. As a consequence, more and more scientific bodies and environmental groups are discussing whether the emission of pollution as a by-product of modern economic activity may endanger the exceptional economic growth path, the world has experienced during the last one and a half centuries.To shed further light on this question, a standard Schumpeterian growth model is enlarged to include an environmental dimension. Thereby it explicitly links the pollution intensity of economic activity to the overall level of technological progress. More precisely, it is assumed that pollution arises as an externality of the intermediate good production process and the amount of pollution created in the production process crucially depends on the overall level of technological progress. Within the framework of the model, pollution has different effects on the agents present in the economy. In the basic model solely the households are directly affected by pollution. In a first extension, the model is enlarged to feature a pollution threshold above which no research is possible. A second extension enlarges the choice set of the households and allows for private pollution abatement.In equilibrium, the economy follows a balanced growth path where output, research investment, consumption, as well as the level of technological progress grow at a constant and positive rate. The effect of pollution on the economic growth rate vitally depends on the households' degree of pollution aversion and even more on the link between pollution intensity and the technology level. All in all, pollution dampens the economic growth rate if a rise in the level of technological progress does not imply a big enough decrease of the pollution intensity. It fosters growth if the pollution intensity falls disproportionately fast when the economy advances.Pollution growth is proportional to the growth rate of the economy and also crucially depends on how the pollution intensity of the production process is linked to the level of technological progress. If the pollution intensity declines fast enough when the level of technological progress increases over time, pollution declines.Otherwise pollution grows continuous...

On the effect of technological progress on pollution: an overlooked distortion in endogenous growth

“…Unlike that author, we model the R&D process as a qualityimproving technology in which better qualities are usually cleaner qualities, but the impact they have on pollution may differ considerably. 9 Gradus and Smulders [8], Hart [11], and Koesler [20], for instance, also present models in which technological progress reduces pollution. However, none of these authors makes a quantitative evaluation of their models and apart from the much simpler model in Gradus and Smulders [8], no other paper has modelled human capital accumulation as, so that distortions in human capital allocation have not previously been studied.…”

“…A couple of articles study the impact of clean(er) technologies on growth and the effects of economic policy, namely taxes, on dirty technologies (see e.g. Hart [11] and Koesler [20]). However, none of these papers considers human capital accumulation nor emphasizes quantitative results, as we do.…”

Environmental Policy in an Endogenous Growth Model with Expanding Variety

“…In an interesting paper, Koesler (2010) mentions that the integration of pollution in an economic growth model requires the consideration of three aspects: the nature of pollution, the source of pollution and the effects of pollution on the agents in the economy. Concerning the nature of pollution, as in Elbasha and Roe (1996) and Koesler (2010) among others, we model the pollution as a flow variable. This means that pollution exclusively depends on the amount of pollution generates in the present period.…”

“…Unlike Koesler (2010), we assume that the government is to levy an environmental tax on polluters in order to offer an incentive to reduce pollution. We assume that this tax is levied proportionally to the level of pollution from the final production sector as in Nakada (2004) and Bianco and Salies (2016).…”