Environmental policy in an endogenous growth model with human capital and endogenous labor supply

This paper analyses environmental fiscal policy within a two-sector endogenous growth model with elastic labor supply. Pollution is modeled as a side product of production. The framework allows us to analyze the consequences of an environmental tax on the economic dynamics. Both transitional dynamics and balanced growth path are computed and the response to an environmental tax change is explored. Short- and long-run welfare costs are also computed. We show that an environmental tax change induces a sharp contrast between short- and long-run effects. The magnitude of this contrast depends on the agents' aptitude to substitute studying time for leisure. (C) 2002 Elsevier Science B.V. All rights reserved.