Abstract
This paper analyzes the long-run impact of an environmental policy on economic growth. A growth model with vertical innovation is modified by including intermediate goods as a source of pollution. Taxation on pollution reduces profits of intermediate firms as well as final outputs. However, it increases their mark-ups and alleviates profit losses. In this setting, profit losses are offset by the general equilibrium effect; thus, the tax enhances R&Ds which drive economic growth while it reduces pollution. If the government provides an R&D subsidy, the growth rate will be accelerated.
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Nakada, M. Does Environmental Policy Necessarily Discourage Growth?. JEcon 81, 249–275 (2004). https://doi.org/10.1007/s00712-002-0609-y
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DOI: https://doi.org/10.1007/s00712-002-0609-y