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Externalities and development of heavy industry

Author

Listed:
  • YAO Yang

    (China Center of Economic Research, Peking University, Beijing 100871, China)

  • ZHENG Dongya

    (China Center of Economic Research, Peking University, Beijing 100871, China)

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.

Suggested Citation

  • YAO Yang & ZHENG Dongya, 2007. "Externalities and development of heavy industry," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 2(4), pages 467-489, December.
    • Handle: RePEc:fec:journl:v:2:y:2007:i:4:p:467-489
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    File URL: http://journal.hep.com.cn/fec/EN/10.1007/s11459-007-0025-x
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    Citations

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    Cited by:

    1. Yao, Yang, 2014. "The Chinese Growth Miracle," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 7, pages 943-1031, Elsevier.
    2. Deng, Hongtu & Xu, Baoliang & Zhao, Yan & Xu, Yonghui, 2022. "Heavy industry priority development strategy and economic growth: The economic logic of the inverted-U theory and economic history explanation," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 1-8.
    3. Wang, Xiaoyu & Sun, Yanlin & Peng, Bin, 2023. "Industrial linkage and clustered regional business cycles in China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 59-72.

    More about this item

    Keywords

    technological externalities; pecuniary externalities; heavy-industry development strategy;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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