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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front. Econ. China    2007, Vol. 2 Issue (4) : 467-489
Externalities and development of heavy industry
YAO Yang, ZHENG Dongya
China Center of Economic Research, Peking University, Beijing 100871, China;
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Abstract In the framework of a dynamic general equilibrium model, this paper studies how vertical externalities affect the development of heavy industry in a developing economy. The model is comprised of an intermediate and a consumer product sector. The production of both types of goods has pecuniary externalities as they are featured by increasing return to scale. However, the production of an intermediate product has an additional advantage to have externalities through its technological linkage with the production of consumer goods. This is related to the nature of the roundabout production of consumer goods: a larger number of intermediate products lead to higher productivity in the production of consumer goods than do more inputs of a fixed number of intermediate products. Therefore, private investment in the intermediate sector is below the social optimal level. Government subsidies can restore the economy to the social optimum, but they become less needed as the consumer sector grows larger and the advantage of the intermediate good sector diminishes.
Issue Date: 05 December 2007
 Cite this article:   
YAO Yang,ZHENG Dongya. Externalities and development of heavy industry[J]. Front. Econ. China, 2007, 2(4): 467-489.
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