Postprint version. Published in Journal of International Trade and Economic Development, Volume 7, Issue 1, March 1, 1998, pages 55-69.
Copyright © 1998 Taylor & Francis. This is an electronic version of an article published in Journal of International Trade and Economic Development. The definitive version is available at http://dx.doi.org/10.1080/09638199800000004.
NOTE: At the time of publication, the author Eric O'N. Fisher was not yet affiliated with Cal Poly.
We analyse a model of overlapping generations in which clean air, a pure public good, is used as a private input into production. Although production exhibits constant returns to scale. endogenous growth can occur. In a laissez-faire equilibrium, firms generate rents that are the value of the pollution they create. These rents crowd out investment and slow economic growth. Such an equilibrium may not support Pareto optimal allocations, but a Pigouvian tax does. Hence, a pollution tax can yield a double dividend because it reduces pollution and increases growth.