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Consider two identical pre-industrial economies, A and B. Both begin in their steady state with a savings rate of 50 percent, they have the same low – but positive – rates of capital depreciation and population growth, and no technological progress.
a) Economy A now has an industrial revolution and a new, positive growth rate of technology. Economy B has no technological progress but wants to try to match the output per capita levels in Economy A by adjusting the savings rate. Using the two-panel Solow model diagram, illustrate, explain, and critically discuss what happens to both economies over time without reference to environmental sustainability.
b) By the 21st century, Economy A has developed into an advanced economy at its steady state but now with no population growth; however, its emissions are above safe levels and it is facing a climate emergency because it only uses “dirty” technology. Using the two-panel Solow model diagram, illustrate, explain, and critically discuss two solutions to the climate emergency that will reduce the emissions of Economy A to safe levels.
