Multiplicative utility and the influence of environmental care on the short-term economic growth rate

This paper addresses the issue of determining under what circumstances economic growth rates are influenced by environmental care. The models used are extensions of the model by Lucas. The extensions consist of output leading to pollution and there is a stock of nature. There is also abatement to counter the effect of pollution. It turns out to be crucial not only to consider the specification of the utility function, but equally important is the specification of the temporary evolution of nature. A specification without a ‘carrying capacity'-term makes the growth rate dependent on environmental care in the long- and short-term. However, such a specification is unrealistic and may lead to an unstable model. If there is a ‘carrying-capacity'-term, the level of nature is constant in the long-term and there can be no influence of environmental care on the long-term growth rate. In the short-term the level of nature is changing and then, environmental care influences the growth rate. This influence can be positive or negative, depending (among other things) on the interaction between the level of nature and the marginal utility of consumption. It is then possible to have a ‘Win–Win'-situation because the environment improves and the growth rate of the economy increases at the same time. A specification with a stock of pollution instead of a stock of nature turns out not to be equivalent, as would be expected because these two entities can be transformed into one another. This is due to the fact that the interaction between the level of stock pollution and the marginal utility of consumption can only go one way and not two ways as with the stock of nature.