Joint Production, Externalities, and the Regulation of Production Networks

Abstract

Real production systems are often vertically integrated in the sense that one production process uses the unwanted joint product of another production process as input. This interrelation- ship links in a non-obvious way the different negative externalities stemming from the production processes. An empirical example is the sulphuric acid industry. Our model of a vertically integrated production system shows how internalising one currently existing externality may create another externality which has thus far not been existent. We also discuss how environmental policy could deal with this problem when regulating integrated production systems.