THE POSITIVE THEORY OF PRODUCTION EXTERNALITIES UNDER PERFECT COMPETITION

Aggregate cost and factor demand functions are used to develop a local envelope function which is applied in a general equilibrium model with production externalities to shed new light on the relationship between the true economy marginal costs and outputs. This relationship induces a structure to the relationship between actual prices and outputs by means of the assumption of no factor demand reversals associated with externality effects. We also provide generalisations of the Stolper-Samuelson and Rybczynski theorems highlighting the role of the externality effects. © 1990.