Nonconvexity induced by external costs on production: Theoretical curio or policy dilemma? (Q1074486)

This paper considers, with a degree of scepticism, the sweeping policy conclusions that can be found in the theoretical literature concerning nonconvexities in the social production set induced by external costs on firms. This literature has provided proofs of the possibility that such nonconvexities exist, but these proofs have readily been interpreted as a basis on which to judge the advisability of policies to control external costs. Indeed, a number of authors have felt able to proceed from specific thereotical examples of the existence of nonconvexity to the opinion that nonconvexity represents a general obstacle to policy. One of the main themes will be to demonstrate that the theoretical possibility of the existence of a nonconvexity at a micro level does not imply the existence of a micro- (or, a fortiori, macro-) nonconvexity in the real world. Nor does it imply that any nonconvexity that does exist in reality is relevant to policy. The intention is not to deny that nonconvexities may represent an obstacle to the efficient control of external costs in specific contexts. But in order to establish the real world policy relevance of a nonconvexity, it is necessary to verify its existence empirically and to establish that it stands in a particular relationship to the no-policy starting point.