Non-linear production, abatement, pollution and materials balance reconsidered

In the environmental economics literature the standard approach of modeling non-linear production and abatement processes is to treat waste emissions “simply as another factor of production” [Cropper and Oates, J. Econ. Lit. 30 (1992) 675–740]. That approach does not 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.