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Economic Development and Sustainability in an Aggregative Model Incorporating the Environment

IJED, Vol. 3 No. 4, (2001)

We investigate an infinite-horizon aggregative closed economy in which production depends essentially on physical capital, natural capital and labour. The natural capital stock is modelled as a renewable resource. The change in the stock of natural capital depends on its autonomous evolution, production and consumption externalities, and environment maintenance programs. The economy is shown to be sustainable only if, for any marginal propensity to consume (MPC), the rate of taxation to maintain the environment exceeds a critical level, or equivalently, for any tax rate, the MPC is below a critical value. If human activities have a net beneficial effect on the environment, the economy will converge to a unique and stable steady state, which can be viewed as a generalized Solow-Swan balanced path. The condition for such a steady state to be sustainable is derived. In a sustainable steady state, the tax rate and MPC can be chosen to maximize per capita consumption.

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