Externalities and development of heavy industry

Yang Yao and Dongya Zheng
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Dongya Zheng: China Center of Economic Research, Peking University, Beijing 100871, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2007, vol. 2, issue 4, 467-489

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.

Keywords: technological externalities; pecuniary externalities; heavy-industry development strategy (search for similar items in EconPapers)
JEL-codes: D62 O20 O41 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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