Pollution Abatement as a Source of Stabilisation and Long-Run Growth

In a two-period overlapping generations model with production, we consider the damaging impact of environmental degradation on health and, consequently, life expectancy. Despite the presence of social constant returns with respect to capital, which would otherwise generate unbounded growth, when pollution is left unabated, the economy cannot achieve such a path. Instead, it converges either to a stationary level of capital per worker or to a cycle in which capital per worker oscillates permanently. The government’s involvement in environmental preservation proves crucial for both short-term dynamics and long-term prospects of the economy. Particularly, an active policy of pollution abatement emerges as an important engine of long-run economic growth. Furthermore, by eliminating the occurrence of limit cycles, pollution abatement is also a powerful source of stabilisation.