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Separable Externalities in Cost and Production Functions

Montgomery, W. David (1974) Separable Externalities in Cost and Production Functions. Social Science Working Paper, 42. California Institute of Technology , Pasadena, CA. (Unpublished)

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The characterization of external effects as “separable” has played an important role in the development of the theory of externalities. The separable case is particularly well behaved when procedures for achieving an optimum allocation of resources in the presence of externalities are examined. Davis and Whinston (1962) find that separability assures the existence of a certain kind of equilibrium in bargaining between firms which create externalities, and that equilibrium does not exist without separability. Kneese and Bower (1968) argue that with separability the computation of Pigovian taxes to remedy externalities is particularly simple. Marchand and Russell (1974) demonstrate that certain liability rules regarding external effects lead to Pareto optimal outcomes if and only if externalities are separable. In each of these cases the problem is posed in terms of two firms related by technological externalities, and separability is defined in terms of a cost function. In this paper, we will characterize that class of production functions which give rise to separable cost functions, and show that the relation between production functions and separable cost functions is by no means as trivial as has been claimed.

Item Type:Report or Paper (Working Paper)
Additional Information:This is an earlier version of working paper #47. I am indebted to Joel Franklin, David Grether, and James Quirk for substantial mathematical assistance and moral support. Research support was provided by the Environmental Quality Laboratory of the California Institute of Technology.
Group:Social Science Working Papers, Environmental Quality Laboratory
Funding AgencyGrant Number
Environmental Quality LaboratoryUNSPECIFIED
Series Name:Social Science Working Paper
Issue or Number:42
Record Number:CaltechAUTHORS:20171101-152526182
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:82857
Deposited By: Jacquelyn Bussone
Deposited On:02 Nov 2017 19:36
Last Modified:03 Oct 2019 18:59

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