Analyzing the Effects of Allocation of Government Expenditure in Health Sector and Prevention of Pollution on Economic Growth: Endogenous Growth Approach

Health and environmental quality have important effects on labor productivity, production and household welfare. Pollution through reducing quality of life and increasing health care expenditure leads to decrease in labor productivity, production and welfare of the households. Environmental pollution causes the failure of the market mechanism. In this setting, one solution for the government in order to internalize the negative externalities is to enforce laws and regulations related to prevent emission of pollutants.This study examines the effects of the allocation of government expenditure to health sector and prevention of pollution in an endogenous growth model. The results from the sensitivity analysis in a steady-state framework imply that spending higher share of the government expenditure allocated to the health sector and to prevent pollution, rather than transfer payments to households, increases the rate of economic growth. In addition, an increase in the government expenditure allocated to health sector instead of preventing emission of pollutants is of unclear effect theoretically on economic growth, but it empirically increases the growth rate of the economy.