On the Joint Dynamics of Pollution and Capital Accumulation

The current paper offers a new explanation on the emergence of threshold effects and multiple equilibria, for which the high (low) income equilibrium is associated with high (low) environmental quality. This new explanation rests on endogenous technological choice in the presence of environmental taxation – an idea whose foundations find strong support from existing empirical evidence. Thus, the interactions between environmental policy and technology choice, within a framework that accounts for the health effects of pollution, can explain some of the observed differences in income, life expectancy and environmental quality among countries.