Transitional Dynamics and Uniqueness of the Balanced-Growth Path in a Simple Model of Endogenous Growth with an Environmental Asset

Abstract

We present an optimal endogenous growth model with an environmental asset which delivers a direct social utility value. The efficiency of the production services provided by the environmental asset directly depend on past capital accumulation. Such an assumption corresponds to assuming that past capital accumulation embodies new technologies requiring lower and lower environmental pressure per unit of output. We show that a sustainable balanced growth, where output and capital both grow at a constant positive rate, and the environmental asset remains constant over time, exists, is unique and is saddle-point stable. We discuss the implications of the optimal balanced growth path for environmental policy and show that emission taxes can be used to support subsidies on capital required to make the competitive endogenous growth rate equal to the socially optimal growth rate.