Economic growth and the environment: The environmental Kuznets curve and sustainable development in an endogenous growth model

In this dissertation we develop a model of human capital with differentiated physical capital, which incorporates the environmental externality of pollution, in order to investigate the interaction between economic growth and the environment in three major ways.; First, we analyze our model to provide a theoretical basis for the empirical evidence of an inverted U-shaped relationship between growth and pollution. It is shown that, in both static and dynamic stages, the timing and strictness of pollution control depend on the potential output level, and that the optimal behavior of pollution displays an inverted U-shaped pattern if the elasticity of marginal utility of consumption is greater than one.; Second, we explore the long-run growth implications in the presence of pollution for cases when pollution affects utility as a flow and a stock. Also, our model is analyzed to address the issue of sustainable development that depends not only the consumption but also the environmental quality. We find that long-run growth and sustainable development can be achieved with the optimal control of pollution, whether pollution has its impact as a flow or stock. Sustained growth is possible as long as the social marginal product of human capital is not affected by the presence of pollution, while the cleaner type physical capital is used in production for better environmental quality. It is also found that the natural decay rate of pollution should be large enough for the existence of optimal solutions when pollution has the cumulative stock effect.; Third, we study the equilibrium growth path of a decentralized economy, and deal with the issue of implementing the social optimum by analyzing different instruments of government policy. Results show that the pollution level is unambiguously increasing in a decentralized economy, and that sustainable development cannot be achieved without government intervention. In regard to the implementation problem, it is shown that both the pollution tax and voucher schemes can implement the social optimum. We find that the effectiveness of government policy is related to the market mechanism associated with the correct price of pollution.