Capital Accumulation, Interest Rate, and the Income-Pollution Pattern : A Simple Model

In this paper we use a modified Ramsey-Cass-Koopmans model to show that the inverse U-shaped income-pollution relationship may be explained through the declining behavior of the interest rate over time and as income grows. If the problem of the benevolent planner is to implement an environmental pollution abatement policy to maximize social welfare,the rate of interest plays a fundamental role in choosing the moment at which the policy should be adopted. In particular, growth and capital accumulation together reduce the marginal rate of return of savings (and capital),making it possible to implement some environmentally friendly devices just when the country becomes rich,and its rate of interest becomes lower than the social discount rate