Structural change with joint production of consumption and environmental pollution: a neo-Austrian approach

This paper examines whether and to what extent the well known necessary and sufficient conditions for the innovation of a new production technique remain valid if the new production technique jointly produces an unwanted and at least potentially harmful output. The formal framework employed here is an extension of the neo-Austrian three-process model as introduced in [Struct. Change Econ. Dyn. 2 (1991) 143]. Three possible ways of comparing the desired consumption output and the negative environmental side-effects in the innovation decision are introduced: a technical, an ecological and an economic solution. Although adjusted necessary and sufficient conditions can be derived, full replacement of the old production technique cannot be achieved in general.