SCALE EFFECT VERSUS INDUCED POLICY RESPONSE IN THE ENVIRONMENTAL KUZNETS CURVE: THE CASE OF U.S. WATER POLLUTION

The environmental Kuznets curve (EKC) could arise from the scale effect in abatement technology as emphasized by Andreoni and Levinson (2001) or from the induced policy response as suggested by Grossman and Krueger (1995). This paper incorporates these two contrary views into a model and quantitatively evaluates their relative importance in shaping the EKC of U.S. water pollution. Our main findings include: (a) some scale effect in abatement technology must exist, otherwise the turning point of the EKC will be unreasonably high; (b) the scale effect alone is not sufficient to explain the practical occurrence of the turning point of the EKC; and (c) the scale effect features critically in the induced policy response as well. (JEL H41, O40, Q20)