The Environment as a Factor of Production: The Effects of Economic Growth and Trade Liberalization

Economic growth and trade liberalization decrease the degradation of natural resources if and only if producers internalize their stock feedback effects on production. For environmental factors without stock effects on production, economic growth is necessarily detrimental if preferences are homothetic. In the non-homothetic case, the relationship between growth and pollution depends on the elasticity of substitution in production between conventional factors and pollution and on the relative degree of curvature of utility in income. The lower are the elasticity of substitution and relative curvature coefficient, the more likely it is that pollution increases with income. An inverted U-shaped relationship between pollution and income is obtained.