Pollution and Economic Growth

We analyse a model of overlapping generations in which clean air, a pure public good is used as a private input into production. Although production exhibits constant returns to scale, endogenous growth can occur. In a laissez-faire equilibrium, firms generate rents that are the value of the pollution they create. These rents crowd out investment and slow economic growth. Such an equilibrium may not support Pareto optimal allocations, but a Pigouvian tax does. Hence, a pollution tax can yield a double dividend because it reduces pollution and increases growth