Clean and dirty technologies under environmental policy

Abstract

This paper aims is to study the contributions of environmental policies to the production of ecological goods, when consumers are indifferent between ecological and dirty goods. It develops a Schumpeterian R&D growth model with endogenous directed technological change. By solving the transitional dynamics numerically and by removing the scale effects, it is shown that, through the price channel, when green firms and green research are supported by policy and/or dirty activities are taxed, technological progress leads to relatively more production of ecological goods and environmental quality improvements. Furthermore, if there is a positive change in the green technological environment, it strongly fosters R&D towards quality improvement of ecological goods, increasing their production.