CESifo Working Paper No. 1549

Nonlinear Production, Abatement,
Pollution and Materials Balance

Reconsidered

Abstract

In the environmental economics literature the standard approach of modeling nonlinear
production and abatement processes is to treat waste emissions "simply as another factor of
production" (Cropper and Oates 1992). That approach doesn't map the materials flow
involved completely and hides, moreover, the exact links between production, residuals
generation and abatement. This paper shows that production functions with emissions treated
as inputs can be reconstructed as a subsystem of a comprehensive production-cum-abatement
technology that is in line with the materials-balance principle. In a simple economy with full
regard of the materials flow it also explores the consequences for allocative efficiency and
efficiency-restoring taxation of multiple and interdependent residuals generated in the
transformation processes of production, abatement and consumption. Finally, the paper
demonstrates that efficiency may require setting the emissions tax rate above or below
conventionally defined marginal abatement cost if the residual subject to abatement is not the
only residual causing pollution.

JEL Code: Q50, Q52.

Keywords: residuals, abatement, pollution, materials balance.

Ruediger Pethig

University of Siegen
Department of Economics

FB5

Holderlinstr. 3
57068 Siegen

Germany

[email protected]

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