Temporary Prosperity or Sustainable Development the Long-Run Impact of Developing Pollution Intensive Industries

We revisit the Environmental Kuznets Curve (EKC) argument that an economy could initially develop in a polluting way and then environmental quality would improve after income grows over a threshold. We propose a dynamic model to capture the interaction among economic growth, human capital accumulation, and environmental pollution. We emphasize the mechanism that pollution stock negatively affects human capital accumulation, which has received increasing support from empirical studies. We demonstrate that the development of pollution-intensive industries impairs a region’s capability for long-run growth and traps the economy at a low level of stagnation, although it helps gear up a short run prosperity. The cost for a dirty economy to switch is expensive and even infeasible if the environmental degradation is irreversible. Policy interventions, such as pollution taxation and human capital subsidies, help alleviate but cannot eradicate the economic stagnation