Is growth bad for the environment? Pollution, abatement, and endogenous growth

The authors investigate the implications of pollution as a byproduct of production and analyze how environmental concern affects the optimal rate of economic growth and optimal government policy. The government must levy taxes on income to finance both productive government spending and abatement activities. It must levy an optimal tax. Too high a tax rate harms prospects for growth and too low a tax rate is bad for the environment. The authors distinguish between two approaches to incorporate the environment into the model stock approach and the flow approach. The flow approach assumes that the level of environmental quality changes instantly if production or abatement levels change (this is relevant for analyzing externalities associated, for example, with noise). The stock approach assumes that pollution and abatement indirectly influence the environment by affecting the rate of change in the environment over time (this is more relevant for analyzing problems of acid rain). They conclude that: win-win situations (in which improvements in economic growth and environmental quality go hand in hand) cannot arise under the flow approach, but can arise under the stock approach - if and only if the intertemporal elasticity of substitution exceeds unity; and maximizing the economy's growth rate is never optimal unless consumers care nothing about the environment.