Dynamic Interactions of Capital, Environment and Renewable Resources with Environment and Resource Policies

Abstract

This paper proposes a dynamic economic model with endogenous physical capital, pollution, and renewable resources. The model is a synthesis of the neoclassical growth theory and the traditional dynamic models of resource and environmental economics with an alternative approach to household behaviour. The model describes a dynamic interdependence among physical accumulation, environmental dynamics, resource change, and division of labour in competitive markets under government intervention with environmental protection. Because of its refined economic structure, the model shows some interactions among economic variables which are not found in the existing literature of economics within a single analytical framework with a microeconomic foundation. We simulate the model to demonstrate existence of equilibrium points and motion of the dynamic system. Our comparative dynamic analysis shows, for instance, that a rise in the tax rate on the consumption of a good will reduce the consumption of the good in the short term and increase its consumption in the long term; efforts towards improving the environment are increased both in terms of capital and labour inputs; resource stock is reduced and its price is increased over time while resource consumption is increased over time; total capital and capital input of the environment sector are increased over time with capital inputs of sectors related to resource and good falling initially but rising soon; both the rate of interest and wage rate rise over time; the labour force of the environmental sector is increased over time but the labour force of the production sector is reduced over time; finally the labour force of the resource sector rises initially, then falls, and rises again.