Environment in Three Classes of Endogenous Growth Models

The implications of environmental externalities are studied within three classes of endogenous growth models viz. the linear technology models, the human capital models, and the R&D and innovation models. The long-run rate of economic growth changes when environmental extemalities are introduced; the direction of change depends on the severity of extemalities and the intertemporal elasticity of substitution. The presence of environmental externalities cause the decentralized growth rate to diverge from the efficient rate. Which rate is bigger than the other depends, among other things, on the valuation of consumption relative to environmental quality. Several policy changes to align the two paths are discussed. The models are calibrated to U.S. data