Environmental pollution, the public sector and economic growth: A comparison of different scenarios

In this paper we present an endogenous growth model with productive public capital and environmental pollution. Emissions result from production and raise the stock of pollution that negatively affects the utility of the household. The government levies an income tax and a tax on emissions and uses its revenues for public investment and for abatement of pollution. This paper studies the structure of the model assuming three different scenarios and analyzes how the latter affects the balanced growth rate of the economy and welfare. The first scenario posits that abatement is set such that the stock of pollution is constant, in the second scenario pollution declines over time, and in the third scenario, pollution grows at the same positive rate as the economic variables.