Technical Report The Production Possibility Frontier under Strong Input-generated Externalities

Li, Gang

2015-07 , Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University
Factor inputs often generate joint products (by-product) that impair production. In some cases, called strong input-generated production externalities in this paper, these negative effects can be so strong that full use of factors becomes ineffcient, and therefore factor use along the production possibility frontier (PPF) is endogenously determined. This paper examines monotonicity, continuity, convexity and other properties of the PPF in such situation. I show that the PPF is strictly decreasing and continuous, but may jump at the corner. The PPF is convex if the by-product generation function is quasi-concave. Moreover, the PPF is either entirely strictly convex or linear if the by-product generation function is linear.

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