|
The question of whether environmental considerations provide a long run constraint on economic growth was analysed extensively in the 1970s using conventional neo-classical growth models. The conclusion from analysis based on the neo-classical growth model, then, was that if resources were essential to production, long run growth would be problematic in the absence of technical progress. In discussion paper No. 1282, Ignazio Musu presents a simple model of optimal sustainable growth when the environmental stock enters the consumers' utility function and production depends on produced capital and on a flow of environmental services. Endogenous growth is obtained by making the productivity growth of the environmental services dependent on past capital accumulation. Optimal growth is sustainable when the use of the environmental asset for production is equal to the regeneration capacity of the environment. The paper describes the features of the optimal sustainable balanced growth path: it is shown that the form of the utility function is crucial in obtaining it. The transitional dynamics to the balanced path is discussed showing that under not unreasonable assumptions on the structure of preferences, the path leading to sustainable balanced growth may either be completely unstable or exhibit indeterminancy. This creates problems in defining an appropriate environmental policy which is shown to require a combination of emission taxes and a subsidy to capital accumulation. Transitional Dynamics to Optimal
Sustainable Growth |