RESOURCE EXTRACTION AND THE DYNAMICS OF ENDOGENOUS GROWTH by George Economides ∗ Department of International and European Economic Studies, Athens University of Economics and Business, 76 Patission street, Athens 10434, Greece. Tel: +30-210-8203729. Fax: +30-210-8214122. Email: gecon@aueb.gr . February 2008 Abstract: This short paper studies the case in which environmental damage takes the form of resource extraction used as an input in private production. The context is a general equilibrium model of endogenous growth in which private agents treat natural resources as a public good and the government chooses second-best optimal policy. Resource extraction can lead to local indeterminacy, i.e. many different equilibrium transition paths. This can partly explain differences in economic growth and environmental quality among countries with similar fundamentals. Keywords: Economic growth; Second-best policy; Indeterminacy; Natural resources. JEL classification: O4, H4, Q3. ∗ Acknowledgements: I am grateful to Apostolis Philippopoulos and Vangelis Vassilatos for helpful comments and suggestions. I also thank Hyun Park and Sajal Lahiri for discussions. All errors are mine.