ABSTRACT
This chapter analyses the potential conflict between economic growth and the maintenance of environmental quality in an overlapping generations model. Since environmental damage may outlive its perpetrators, overlapping generations’ models provide an appropriate demographic structure for analysis of environmental externalities. In general, environmental externalities could arise from production or consumption and could affect welfare or productivity. The chapter identifies interior equilibrium without external increasing returns and considers equilibrium with external increasing returns. Increased saving benefits generations through the external increasing returns, and hurts generations through reduced maintenance and greater consumption; higher saving is desirable if the first effect dominates. The dynamics of the economy therefore imply a negative correlation between environmental quality and growth under zero maintenance, in contrast to the positive correlation at interior equilibrium. Agents in economies with little capital or with high environmental quality may choose not to engage in maintenance of the environment.
