On the theory of a firm : the case of by-production of emissions

Abstract

Five attributes of emission generating technologies are identified and a concept of byproduction is introduced, which implies these five attributes. Murty and Russell [2010] characterization of technologies, which requires distinguishing between intended production of firms and nature's laws of emission generation, is shown to be both necessary and sufficient for by-production. While intended production could be postulated to satisfy standard input and output free-disposability, these will necessarily be violated by nature's emission generation mechanism, which satisfies costly disposability of emission as defined in Murty [2010]. Marginal technical and economic costs of abatement are derived for technologies exhibiting by-production. A simple model of by-production illustrates that, while common abatement paths considered in the literature do involve a technological trade off between emission reduction and intended production, there also almost always exist abatement paths where it is possible to have both greater emission reductions and greater intended outputs. Further, marginal abatement costs will usually be decreasing in the initial level of emissions of firms. Counterintuitive as these results may sound in the first instance, they are intuitively obvious in the by-production approach as it is rich enough to incorporate both standard economic assumptions with respect to intended production of firms and the rules of nature that govern emission generation