ARE THERE LIMITS TO GROWTH

A simple theoretical model of pollution is developed that generates an inverted U-shape relationship between per capita income and environme ntal quality. This model is then used to study long-run growth. The sa me inverted U-shape is shown to appear in time series, and the prospec ts for sustained growth are shown to hinge on whether increasingly str ict environmental regulation is compatible with a constant rate of ret urn on capital. Implementation is also studied. Tax and voucher scheme s are shown to have an advantage over direct regulation because they p rovide the correct incentives for capital accumulation.