pendent production, residuals generation and abatement would relate to production functions
of type (1).4
The main objectives of the present paper are (i) to undertake a fresh exploration of that issue
with the important qualification to keep the analysis strictly (and explicitly!) in line with the
materials-balance principle and (ii) to assess the consequences of (i) for allocative efficiency
and pollution control. An immediate implication of adopting a rigorous materials-balance
perspective is to insist that the treatment of emissions in (1) as 'conventional inputs in produc-
tion functions' is only acceptable as a convenient though purely formal analytical device not
meant to deny the emissions' true nature as unwanted by-products generated in the process of
producing wanted goods and then discharged into the environment.
To further clarify this point suppose f and m are constant in (1). Since Ye, the marginal
abatement cost in terms of the wanted output, is positive, one can choose from a menu of
good things, y, and bad things, e, but more of the good inadvertently comes along with more
of the bad. While this property of (1) serves the needs of model building in environmental
economics well, (1) is less appealing, if not outright embarrassing, regarding its materials-
balance implications. To see that suppose all units of the outputs y and e as well as all units of
input m are defined such that each unit is equal to one unit of weight. Suppose further that the
technology (1) is understood as a process of transforming the material m into the outputs y
and e. With these qualifications one may wish to know whether (1) can be considered the de-
scription of a transformation process that involves no material inputs other than m and no ma-
terial outputs other than y and e. The answer is an outright and definitive no. (1) would bla-
tantly violate the materials-balance principle, since that principle requires m = e + y if no
other inputs and outputs are involved. An obvious implication of m = e + y is dy∣de = -1 for
constant m, which is, of course, inconsistent with properties (Y) that requires Ye > 0 .
It is not our intention to join in the chorus of those who declare all pieces of research in envi-
ronmental economics fundamentally flawed that are found guilty of not properly regarding the
materials-balance principle. We rather aim at answering the intriguing question whether, and
if so how, the production activity (1) can be reconciled with the materials-balance principle.
We will show that (1) can be reconstructed, indeed, as part of a comprehensive production-
cum-abatement technology that is in line with the materials-balance principle.
4 The only theoretical inquiry into that issue we are aware of is offered in Siebert et al. (1980). Yet these authors
fail to fully account for the materials-balance principle which is why their approach is of limited relevance for
our subsequent analysis.