On Endogenous Growth: The Implications of Environmental Externalities

This paper uses an endogenous growth model to examine the interaction between trade, economicgrowth, and the environment. We find that whether trade enhances or retards growth depends on therelation between factor intensities of exportable, importable, and R&D and the relative abundanceof the factor R&D uses more intensively. Depending on the intertemporal elasticity of substitution,the long-run rate of economic growth changes with environmental externalities. Concerns about theenvironment can explain a significant part of cross-country difference in growth rates. For theempirically reported range of the elasticity of intertemporal substitution, countries which care moreabout the environment grow faster. The effects of trade on the environment and welfare depend onthe elasticities of supply for the two traded goods, the terms of trade effect on growth, and pollutionintensities. The decentralized and Pareto optimal growth rates are, in general, different. The marketgrowth rate is bigger than the optimal rate the larger the degree of monopoly power in the innovationsector and the stronger the effects of environmental externalities. The policy implications of thisdivergence are discussed. We also consider numerical exercises to broaden the insights from theanalytical results and allow for incorporating pollution abatement