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RESEARCH PRODUCT

Environmental pollution, sustained growth, and sufficient conditions for sustainable development

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Abstract Sustainability and optimality are the two main issues discussed in environmental economics and economic growth theory. This paper studies economic growth in the presence of two environmental externalities. The first one is local and gives account of the marginal damage from the emissions flow. The second one is aggregate, or global, and relates to the extreme damage which may happen if the accumulated stock of pollutants is on the threshold of a worldwide catastrophe. In this context, the decentralized equilibrium is inefficient and economic growth unsustainable. However, we find and completely characterize the socially optimal equilibrium, which shows that sustained growth is feasible along the balanced path. Efficiency alone is not sufficient for sustainability, but Pareto optimality is necessary to produce sustainable outcomes. According to our results, the sustainability of the optimal sustained long-run growth depends on environmental constraints, production and abatement technologies, individual preferences, and population dynamics. This means that government has a clear incentive for intervention by means of direct and indirect policies. These ones cover the usual Pigouvian taxes and subsidies, the setting of emission standards, and the public provision of abatement. Moreover, the government can promote eco-efficiency in the use of materials, implement information campaigns that influence social preferences for environmental conservation, or even put into action population controls and other measures that encourage the demographic transition.