ON ENDOGENOUS GROWTH - THE IMPLICATIONS OF ENVIRONMENTAL EXTERNALITIES

This paper develops an endogenous growth model to examine the interact ion between trade, economic growth, and the environment. We find that whether trade enhances or retards growth depends on the relation betwe en factor intensities of exportable, importable, and R & D and the rel ative abundance of the factor R & D uses more intensively. Depending o n the intertemporal elasticity of substitution, the long-run rate of e conomic growth changes with environmental externalities. Concerns abou t the environment can explain a significant part of cross-country diff erence in growth rates. For the empirically reported range of the elas ticity of intertemporal substitution, countries which care more about the environment grow faster. The effects of trade on the environment a nd welfare depend on the elasticities of supply for the two traded goo ds, the terms of trade effect on growth, and pollution intensities. Th e decentralized and Pareto optimal growth rates are, in general, diffe rent. The market growth rate is greater than the optimal rate the larg er the degree of monopoly power in the innovation sector and the stron ger the effects of environmental externalities. The policy implication s of this divergence are discussed. We also consider numerical exercis es to broaden the insights from the analytical results and allow for i ncorporating pollution abatement. (C) 1996 Academic Press, Inc.