The transition from dirty to clean industries: optimal fiscal policy and the environmental Kuznets curve

Steven P. Cassou, Stephen F. Hamilton
2004 Journal of Environmental Economics and Management  
This paper investigates privately and socially optimal patterns of economic development in a two-sector endogenous growth model with clean and dirty goods. We consider a second-best fiscal policy framework in which distortionary taxes jointly influence economic growth and environmental quality. In this policy setting, three conditions produce an Environmental Kuznets Curve (EKC): (i) dirty output is bounded; (ii) clean output grows endogenously; and (iii) growth in the dirty sector reduces
more » ... h in the clean sector. These conditions do not arise with a consumption externality, but can emerge with a production externality. Endogenous labor supply implications are also investigated. Although not necessary for producing an EKC, endogenous labor supply provides additional linkages that produce an EKC under circumstances in which it would otherwise not appear. 14 There has been considerable recent work investigating these kinds of programs, including Lucas and Stokey [22] , Jones et al. [16, 17] , Zhu [32], and Cassou and Lansing [5] .
doi:10.1016/j.jeem.2003.11.007 fatcat:bprpc2d52bb25ja6jcepm2pgou