Stochastic pollution and environmental care in an endogenous growth model

The impact of pollution and abatement policy within a stochastic endogenous growth model is analyzed. Environmental care is provided by the government and financed through income taxation and government bonds. Due to environmental preferences and partial perception of the individual's impact on pollution, government debt influences equilibrium growth. Hence, there is an additional growth effect of income taxation due to portfolio adjustment. It is shown that the optimal income tax rate decreases with the perception of the influence of individuals on aggregate capital. In contrast, the impact of environmental preferences and uncertainty on optimal environmental policy is ambiguous.