In an interesting paper published in Environmental and Resource Economics,
Huang and Cai (1994) developed an AK type technology endogenous growth
model to address the impact of the environment on economic growth and social
welfare. In that paper the emission is treated as an inevitable by-product of
productive activity and the stock of pollution is put into the agent’s utility function
to capture the environment’s amenity value. However, the Huang and Cai (1994)
conclusions may be modified, or at least accepted with considerable caution, since
in their analysis the abatement expenditure share is inappropriately shown to be
constant at all times. In this paper we attempt to re-examine what the true forces
are that govern the balanced growth rate.
The rest of the paper is organized as follows. Section 2 outlines the Huang and
Cai (1994) model and shows that there exists a unique endogenously-determined
steady-state economic growth rate and steady-state abatement expenditure share
when the economy is characterized by a unique perfect-foresight equilibrium.
Section 3 re-examines the comparative statics reported in Huang and Cai (1994).
Specifically, we will address how the economic growth rate reacts following
changes in environmental factors and public abatement expenditure. Finally, some
concluding remarks are presented in section 4.
Environmental and resource economics 20(2), pp.165-172