Are There Limits to Growth?

A simple theoretical model of pollution is developed that generates an inverted U-shape relationship between per capita income and environmental quality. This model is then used to study long-run growth. The same inverted U-shape is shown to appear in time series and the prospects for sustained growth are shown to hinge on whether increasingly strict environmental regulation is compatible with a constant rate of return on capital. Implementation is also studied. Tax and voucher schemes are shown to have an advantage over direct regulation because they provide the correct incentives for capital accumulation. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.