8 - Further implications of variable returns to scale

Abstract

This chapter describes the production side of the economy, allowing the incidence of externalities to lie in any industry and in all industries. It reviews some of the implications of variable returns for the topology of the production set, for the sign pattern of price-output responses, and for the traditional Stolper–Samuelson and Rybczynski theorems. The chapter also focusses on the following points: (1) the production transformation locus and the locus of competitive outputs are everywhere negatively sloped, and therefore, coincide if inter-industrial externalities are everywhere nonpositive; (2) the responses of outputs and of the ratio of factor rentals to a change in relative commodity prices is everywhere normal if each industry generates nonpositive externalities everywhere, with the inter-industrial externalities not stronger than the intra-industrial externalities; and (3) the responses of outputs to endowment changes are of a weak Rybczynski type if the ratio of factor rentals is held constant and if inter-industrial externalities are everywhere nonpositive.