Production Capacity Expansion Research Articles

00/03013 Taxing CO 2 and subsidising biomass: analysed in a macroeconomic and sectoral model

This paper analyses the combination of taxes and subsidies as an instrument to ensure a reduction of CO2 emission. The objective of the study is to compare recycling of a CO2 tax revenue as a subsidy to biomass use as opposed to traditional recycling like reduced income or corporate taxation. A model of the energy supply sector of Denmark is used to analyse the effect of a CO2 tax in combination with using the tax revenue for subsidies to biomass. The energy supply model is linked to a macroeconomic model such that macroeconomic consequences of tax policies can be analysed along with consequences for specific sectors as agriculture. Electricity and heat are produced at heat and power plants and utilising fuels which minimise total fuel cost, while the authorities regulate capacity expansion technologies. The effect of fuel taxes and subsidies on fuels is very sensitive to the fuel substitution possibilities of the power plants and consequently the extent to which expansion technologies have been regulated. It is shown how a relatively small CO2 tax of 15 USD/tCO2 and subsidies to biomass can produce significant shifts in the fuel input-mix, when the expansion of production capacity is regulated to ensure a flexible fuel mix. The main finding is that recycling to biomass use will reduce the level of CO2 tax necessary to achieve a specific emission reduction. Policies to ensure a more intensive use of such relatively expensive renewable energy sources as biomass could be implemented with only small taxes and subsidies.

Taxing CO 2 and subsidising biomass: analysed in a macroeconomic and sectoral model

This paper analyses the combination of taxes and subsidies as an instrument to enable a reduction in CO 2 emission. The objective of the study is to compare recycling of a CO 2 tax revenue as a subsidy for biomass use as opposed to traditional recycling such as reduced income or corporate taxation. A model of Denmark’s energy supply sector is used to analyse the effect of a CO 2 tax combined with using the tax revenue for biomass subsidies. The energy supply model is linked to a macroeconomic model such that the macroeconomic consequences of tax policies can be analysed along with the consequences for specific sectors such as agriculture. Electricity and heat are produced at heat and power plants utilising fuels which minimise total fuel cost, while the authorities regulate capacity expansion technologies. The effect of fuel taxes and subsidies on fuels is very sensitive to the fuel substitution possibilities of the power plants and also to the extent to which expansion technologies have been regulated. It is shown how a relatively small CO 2 tax of 15 US$/tCO 2 and subsidies for biomass can produce significant shifts in the fuel input-mix, when the expansion of production capacity is regulated to ensure a flexible fuel mix. The main finding is that recycling to biomass use will reduce the level of CO 2 tax necessary to achieve a specific emission reduction. Policies to ensure a more intensive use of such relatively expensive renewable energy sources as biomass could be implemented with only small taxes and subsidies.

Arms production in the third tier: An analysis of opportunity and willingness

Major determinants of third world military industrialization operate at the domestic, regional, and global levels. I summarize these and then examine their relative importance by analyzing time‐series cross‐section data for twelve arms producers from 1968 to 1990. Overall, there is considerable support for the various factors identified in the literature. However, my findings do highlight the importance of opportunity, perhaps more than willingness, as an explanation for changing levels of third tier arms production. Resolution of the tensions that drive regional militarization and the eruption of military conflict should have some positive effects ‐on restraining the expansion of arms production capacity. But there also seems to be a certain inevitability to the process, a process that is limited primarily by states' resources, industrial capacities, and access to weapons‐production technologies.

Economic value and cost of automated on-line poultry inspection for the US broiler industry

The US Department of Agriculture, Food Safety and Inspection Service (FSIS) uses visual (organoleptic) methods to inspect individual carcasses on-line at US broiler slaughter plants. The current system is very labor-intensive and is directly related to industry production capacity. Continued expansion of production capacity within the broiler industry requires additional staffing of FSIS inspectors. However, FSIS is currently under a hiring freeze. Also, FSIS wants to redeploy on-line inspectors to more pressing tasks, such as the oversight of industry compliance with food safety and pathogen reduction standards. This study evaluates the economic value and costs of using an automated inspection technology in place of visual organoleptic inspection in the US broiler industry for the period 1997–2001. The results indicate the US broiler industry would gain from $1.55–$2.57 billion in discounted throughput value over the next five years if automated inspection is used in place of organoliptic methods and line speeds are operated at 100 birds per min. The results also indicate FSIS could redeploy approximately 1342 inspectors to other in-plant tasks by adopting automated inspection, but would have to pay additional expenses related to the installation of the technology in slaughter plants. These additional expenses range from $32 to $59 million in discounted cost over the five-year period, and could be payed either in part or in whole by the broiler industry.

AIXTRON focuses on MOCVD equipment

For the past 15 years, AIXTRON AG of Aachen, Germany, has been manufacturing MOCVD equipment for the compound semiconductor industry. A production capacity expansion of 400% in the past three years reflects the company's success in the marketplace. Capital raised by the IPO last November will be used for further expansion in production, R&D and service.

Hierarchical capacity expansion and production planning decisions in stochastic manufacturing systems

AbstractWe present an approach of hierarchical decision making in production planning and capacity expansion problems under uncertainty. We show that under reasonable assumptions, the strategic level management can base the capacity decision on aggregated information from the shopfloor, and the operational level management, given this decision, can derive a production plan for the system, without too large a loss in optimality when compared to simultaneous determination of optimal capacity and production decisions.The results are obtained via an asymptotic analysis of hierarchical investment and production decisions in a manufacturing system with machines subject to breakdown and repair. The demand facing the system is assumed to be a deterministic monotone increasing function. The production capacity can be increased by purchasing a finite number of new machines over time. The control variables are a sequence of purchasing times and a production plan. The rate of change in machine states is assumed to be much larger than the rate of discounting of costs. This gives rise to a limiting problem in which the stochastic machine availability is replaced by the equilibrium mean availability. The value function for the original problem converges to the value function of the limiting problem. Three different methods are developed for constructing decisions for the original problem from the optimal solution of the limiting problem in a way which guarantees the asymptotic optimality of constructed decisions. Finally, it is shown that as the number of machine that could be purchased tends to infinity, the problem approximates the corresponding problem with no limit on number of machine purchases.

Certificate-of-Need Regulation and Entry: Evidence from the Dialysis Industry

Certificate-of-need (CON) regulation is widely used in the health care industry.1 The primary alleged purpose of this regulatory tool is to reduce industry costs by preventing unnecessary duplication of facilities.2 While specific CON regulations vary from state to state, virtually all require new firms planning to enter the industry and incumbent firms planning an expansion of productive capacity to submit an application in which the applicant must demonstrate: (1) a market demand (or need) for the incremental output, investment, or new service being proposed, and (2) the inability or unwillingness of existing firms to meet that demand with facilities already in place. Moreover, incumbent firms are offered the opportunity to formally intervene during the CON review process to express their opposition to the proposed entry or expansion plans. Economists have long been skeptical of this form of regulation. At least three fundamental reasons underlie this skepticism. First, private investors are likely to have vastly superior information to that held by regulators on the need for new capacity. These investors are much more familiar with industry conditions than regulators, and they are placing their own money at risk by entering and/or expanding. Second, given the obvious incentive of existing firms to oppose virtually any entry, expansion of capacity, or introduction of new services by competitors and the fact that this policy provides an open forum for such opposition, the likelihood that CON regulation actually serves the interests of consumers by fostering lower industry costs is remote. And third, to the extent that CON regulation is effective in reducing net investment in the industry, the economic effect is to shift the supply curve of the affected service back to the left. Since most medical services are thought to exhibit inelastic demand (due to the general unavailability

CAPACITY AND PRODUCTION DECISIONS IN STOCHASTIC MANUFACTURING SYSTEMS: AN ASYMPTOTIC OPTIMAL HIERARCHICAL APPROACH

We present a new paradigm of hierarchical decision making in production planning and capacity expansion problems under uncertainty. We show that under reasonable assumptions, the strategic level management can base the capacity decision on aggregated information from the shopfloor, and the operational level management, given this decision, can derive a production plan for the system, without too large a loss in optimality when compared to simultaneous determination of optimal capacity and production decisions. The results are obtained via an asymptotic analysis of a manufacturing system with convex costs, constant demand, and with machines subject to random breakdown and repair. The decision variables are purchase time of a new machine at a given fixed cost and production plans before and after the purchase. The objective is to minimize the discounted costs of investment, production, inventories, and backlogs. If the rate of change in machine states such as up and down is assumed to be much larger than the rate of discounting costs, one obtains a simpler limiting problem in which the random capacity is replaced by its mean. We develop methods for constructing asymptotically optimal decisions for the original problem from the optimal decisions for the limiting problem. We obtain error estimates for these constructed decisions.

The coming capacity shortfall: The constraints on OPEC's investment in spare capacity expansion

The principal oil producing countries have recognized that they have insufficient production capacity to support strong, future demand growth. Since 1990 they have announced ambitious production capacity expansion programmes. The total of these announced programmes will exceed $170 billion by the end of 1995, not including the huge capital needs of the former USSR. These programme will run into difficulties that will result in much less capacity being added than is now targeted. The problems will vary according to the different character of capacity expansion that each country faces. Each programme will have different costs and different technological challenges. In addition, each of the principal producing states confronts different degrees of financial, policy and structural as well as technological constraints on their efforts to expand capacity. It therefore appears that the announced expansion plans will fall short of targets. This will increase the pressure on oil price as demand grows through the mid-1990s.

Optimizing the integration of photovoltaic systems with electric utilities

The author introduces a comprehensive simulation package whereby the optimal size, operation, performance and economics of a photovoltaic (PV) system can be determined in the utility-integrated mode. The central issue is to present a single definitive optimization model. A stepwise analytical methodology starting at the solar resource and culminating in the value of the PV system in terms of avoided costs is provided. The methodology includes processing of the solar irradiance; identification of the PV system's configuration and operational features; identification of real-time system controls in the presence of PV generation; security assessment in the presence of PV and production costing and capacity expansion analysis with PV. The optimization package is subdivided into five different subgroups based on their respective purposes in the context of the overall scheme. The author describes the functions of each subgroup.< <ETX xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">&gt;</ETX>

A Tie-Breaking Rule for Discrete Infinite Horizon Optimization

We study discrete infinite horizon optimization problems without the common assumption of a unique optimum. A method based on solution set convergence is employed for finding optimal initial decisions by solving finite horizon problems. This method is applicable to general discrete decision models that satisfy a weak reachability condition. The algorithm, together with a stopping rule, is applied to production planning and capacity expansion, and computational results are reported.

Learning and Capacity Expansion under Demand Uncertainty

A competitive, dynamic model of entry into a new industry is set up and both its positive and normative aspects are studied. The main assumptions are that entry is sequential, that it occurs under imperfect information on the size of the market and that better information becomes available as goes on. The gradual improvement in information is due to the fact that later waves of entrants are able to observe the profitability of earlier entrants. The major results reported here (under suitable restrictions) are that the equilibrium rate of entry is monotonically decreasing over time, and that-at any given point in time-it is smaller than the socially optimal one. When a new market opens (as a result of a product being newly invented, for instance) or when an existing market starts to expand, uncertainty with respect to its size is likely to prevail. As a result of this uncertainty, entry of firms into such markets typically will occur in waves: some firms will enter initially, while others will wait to see the consequences of that initial entry. If the experience of early entrants is favourable, entry will continue; otherwise entry will cease. Hence, with the introduction of a new product, two phases are associated: the phase, typified by positive operating profits for existing firms and expansion of productive capacity due to entry of new firms, and the mature phase, typified by erosion of profits and fixed total productive capacity. Empiricists estimating the time-pattern of investments during the growth phase have found an S-shaped diffusion curve (see Mansfield (1986), and Gort and Klepper (1982)). The purpose of the present paper is to theoretically characterize these time-patterns and to investigate their welfare properties. Any attempt to model the type of entry described above, must account for differences in both entry dates and resultant earnings. In other words, the theory must explain why the realized earnings of different cohorts of firms are not equal. Often such ex post differences are reconciled by assuming heterogeneity with respect to some latent underlying characteristic (managerial ability, for instance) and attributing differences in earnings to differences in that characteristic. In this paper, instead, earning differentials are attributable to luck only: ex ante all firms are technologically identical and equally capable of forecasting market prospects and rationally acting upon those forecasts. Ex post, some firms turn out to have entered at the right time and are-for that reason-more profitable. The model developed in this paper analyzes a parametric example of a sequential entry problem in which the uncertainty over market size is gradually resolved over in a Bayesian setting. In an environment of perfect competition and constant returns-toscale, a free-entry equilibrium concept is introduced and the aggregate implications of the time-path of investments are derived. I then compare this (actual) time-path to the optimum. This comparison is interesting because the equilibrium is analysed under the

Thai construction industry: Demand and projection

Thailand is fast becoming a newly industrializing country and, consequently, a large number of construction works are projected for the future. This study is an attempt to gain further insight into the demand for construction activities in Thailand. Three types of construction - residential, non-residential and ‘other’ (mainly public projects) - were considered. The demand function for each type of construction was estimated using regression analysis. Results indicate that rising per capita income, the ratio of consumer price index to the construction cost index, and population are the major determinants of demand for residential construction. The expansion of industrial production capacity and the ratio of corporate savings to the construction cost index are the most significant factors affecting the demand for non-residential construction. The demand of other construction is found to be largely a function of rising revenues of government and of public utilities. Further, projection results indicate that...

Ethyl alcohol as a motor fuel in Brazil: A case study in industrial policy

The Brazilian Pro-Alcohol Program is an ambitious effort to replace imported gasoline with ethyl alcohol derived from domestically grown sugar cane. It involves an intricate and politically difficult combination of economic policy in the agricultural and industrial sectors, incentives to private innovation and investment, and public investment in agricultural research and industrial innovation. The decentralized execution of the program depends on effective integration of economic and technology policy. Although an outstanding technical success, the Pro-Alcohol program became an economic white elephant when world energy prices unexpectedly plunged in the mid-1980s. Oil prices would have to return to $23–$30 a barrel (1986 dollars) for the program to cover even its operating costs, making it a costly insurance policy against what today seems to be an unlikely contingency. What is more, conservation of diesel fuel has not kept pace with that of gasoline and fuel oil, so that much of the gasoline saved by Pro-Alcohol has had to be reexported at a discount. In its early stages, Pro-Alcohol offered extremely generous investment incentives and price guarantees in order to encourage the expansion of cane production and distillery capacity. Alcohol prices were set so as to eliminate any subsidy to the Brazilian motorist. Export of cane produced on contract for the program was forbidden, so as not to disrupt the world sugar market. These arrangements have resulted in a heavy implicit tax on the Brazilian motorist (compared to the cost of imported gasoline), a windfall for distillery owners, and an uncertain supply of sugar cane and hence of alcohol. But the Brazilian government is boxed in. The Program involves so many segments of Brazilian society that it has been impossible to curtail, and indeed encouragement to the manufacture of alcohol-burning cars continued well past any possible economic justification.

The prospects for the international economy

Although the international economy seems to be well on the road to recovery, the question remains as to how much of this recovery is of a short-term cyclical nature and how much an expression of a renewed longer-term trend towards economic growth. Are we merely witnessing an increased utilisation of existing production capacities without a parallel expansion of production capacities themselves? What conditions have to be fulfilled to ensure the latter?

A review of electric production simulation and capacity expansion planning programs

This paper surveys currently available computer programs for electric production simulation and capacity planning optimization. Algorithms for electric production simulation and capacity planning optimization are reviewed. Representative programs are then outlined.

Supply-Side Theory and Capital Investment

In light of the evidence, supply-side theory should by now be dead and buried. According to the supply-siders, all that was needed to turn the economy around quickly was the right kind of tax relief. Their crowning achievement was, as officially titled, The Economic Recovery Tax Act of 1981. This act gave corporations an assortment of tax benefits designed to encourage expansion and improvement of productive capacity. Taxes on the income of wealthy individuals were reduced in order to swell the volume of savings. And, believe it or not, the tax reforms were supposed to get people to work harder and longer hours. All of this, it was solemnly promised, would provide the wherewithal and the incentives for an immediate burst of new investment, which in turn would set off a new and lasting prosperity. But the real world did not behave the way the supply-siders promised it would. Instead of rising, investment, production, and employment in fact kept on declining throughout 1982.This article can also be found at the Monthly Review website, where most recent articles are published in full.Click here to purchase a PDF version of this article at the Monthly Review website.

Operations Research and Capacity Expansion Problems: A Survey

Planning for the expansion of production capacity is of vital importance in many applications within the private and public sectors. Examples can be found in heavy process industries, communication networks, electrical power services, and water resource systems. In all of these applications, the expansion of production capacity requires the commitment of substantial capital resources over long periods of time. Capacity expansion planning consists primarily of determining future expansion times, sizes, and locations, as well as the types of production facilities. Since the late 1950s, operations research methodology has been used to develop various models and solution approaches suitable for different applications. In this paper, we attempt to unify the existing literature on capacity expansion problems, emphasizing modeling approaches, algorithmic solutions, and relevant applications. The paper includes an extensive list of references covering a broad spectrum of capacity expansion problems.

The Reasons for the Polish Crisis of 1980-81

The main reason for the Polish crisis is systemic or structural in nature. Where discussions about the origins of this crisis go wrong is that they concern themselves one-sidedly with the sphere of the political superstructure and reduce the main reason for the crisis to distortions of the form of government. The author classes the present economic system in Poland as a state-controlled economy; it is true that there have been various organizational changes and changes in the running of the economy, but the essence of the system has remained the same. Although for a time this system promoted the expansion of productive capacity, after a while it began to exert a negative influence on economic development: disproportions in the economy became sharply intensified, quantitative growth slackened, followed by a slump in production, and the costs of production, productivity of labour and, above all, innovation of production took an unfavourable turn. The main goal achieved in the economy was one-sided economic growth founded on the spurious economic law whereby growth of production of the means of production is faster than growth of production of goods for consumption. The main reason for the crisis was the consolidation of state control over the economy, combined with its bureaucratization, the failure to bring about further socialist changes, and the absence of social and political democracy. Apart from the main systemic reason for the Polish crisis, there are also specific reasons. These include, notably, the backwardness of the economy and the associated preoccupation with excessive acceleration of economic growth, the specific agrarian structure, national traditions, and a political structure encompassing, among other things, the considerable influence of the Church and the intelligentsia, which retained its separate identity. A direct reason for the crisis lay in the changes, to a large extent retrograde, which took place during the period 1971-80 both in the economy and its system of management and in politics.

Determinants of Capitalist Expansion

The expansion process of a capitalist economy has been characterized analytically by the idea of warranted or growth.' The idea of desired growth incorporates two decisive aspects of the accumulation process: (1) That investment is justified by the profit which is expected to be provided by it in the future, and (2) that the profitability of investment depends on the effective demand for its products which depends on the demand-creating effects of aggregate investment. Desired growth corresponds to that rate of investment whose demandcreating effects will realize profit at a rate just sufficient to induce firms to continue to accumulate at that same rate. The Keynesian theory establishes, in a compelling way, that the growth process of a capitalist economy has the capacity to sustain itself within a causally closed circle of investment stimulated by prospective profitability, and profitability determined by the market-generating power of investment. The link which binds the growth of demand to expansion of productive capacity is the capitalist firm, which must be seen, therefore, to play a crucial role in the growth process. Nonetheless, while the firm plays an essential role, its role is restricted to that of transforming demand into capital investment and capital investment into a stream of output. In effect, the firm intermediates in a process of aggregate growth. Given the intermediating function of the firm, the expansion of the capitalist economy will depend on the parameters which express the conditions by which investment is translated into demand and growth of demand into investment. These parameters (e.g., the ratio of saving to income in the simplest models) express a set of conditions which are the real determinants of capitalist expansion. These determinants