A Circular Economy Model of Sustainable Growth

Abstract

A circular economy is in essence a closed system in which all goods produced have become inputs to sustain the system in the long run. By taking some of the key principles of a circular economy such as reducing waste and pollution, increasing recycling, and improving the natural environment into consideration, this paper provides a general equilibrium analysis of a circular economy model (CEM) in which the recycling of output waste is endogenously determined. When a unique steady-state balanced-growth path exists in a circular economy, consumption, the waste stock, and the pollution stock all grow at the same rate. Theoretically, this paper also shows that the government can implement a negative income tax and a positive pollution tax to optimally allocate all resources in a market economy and sustain long-term economic growth.