An investigation of issues relating to where energy should enter the production function

Karen Turner, John Swales, Patrizio Lecca

Research output: Contribution to journalArticle

22 Citations (Scopus)

Abstract

This paper examines the impact of imposing different separability assumptions in the specifications of the standard hierarchical KLEM production function in a computable general equilibrium (CGE) model. The appropriate means of introducing energy to production functions has been a source of debate for a number of years. However, while modellers often subject results to parametric sensitivy analysis regarding the values associated with elasticities of substitution between inputs, it is rarely the case that the structure of the production function is subjected to testing. However, the chosen structure reflects the modeller's view about elasticity between different inputs and will have implications for model results wherever there are changes in relative prices. We illustrate our argument by introducing a simple demand shock to a CGE model of the Scottish economy (targeted at the energy supply sector) under different assumptions regarding the structure of the KLEM production function and separability assumptions therein.
Original languageEnglish
Pages (from-to)2832-2841
Number of pages10
JournalEconomic Modelling
Volume28
Issue number6
Publication statusPublished - 2011

Keywords

  • energy industry
  • production economics

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