This paper develops a standard neoclassical model of growth in which pollution affects individuals' health and the government can influence the quality of the environment via a tax on emissions. In such an economy, we analyze the effects of a change in this policy on the trade-offs between the resources allocated to abatement, health and consumption (or savings). We demonstrate that less pollution lowers healthcare spending, and shows the existence of an inverted U-shaped relationship between the pollution tax and (i) the level of health; (ii) consumption; and (iii) welfare. Results are analyzed both at steady state and along a transition path.
