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The Efficiency-Flexibility Trade-Off and the Cost of Unexpected Oil Price Increases
Lars Bergman and Karl-Göran Mäler
The Scandinavian Journal of Economics
Vol. 83, No. 2, The Impact of Rising Oil Prices on the World Economy (1981), pp. 253-268
Published by: Wiley on behalf of The Scandinavian Journal of Economics
DOI: 10.2307/3439899
Stable URL: http://www.jstor.org/stable/3439899
Page Count: 16
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Abstract
The starting point for this article is the notion of a possible trade-off between static efficiency and ex post flexibility of input proportions. It is found that under reasonable assumptions, plants designed for a single input price constellation can be made more efficient than those designed for a variety of input price constallations. In order to obtain an estimate of the economic significance of flexible input proportions ex post, a simulation model of the general equilibrium type is used to analyze the impact of unexpected oil price increases. The results indicate that, compared to a case with rigid technology, the social cost of an oil price increase is significantly lower when the technology is flexible. However, other rigidities, e.g. on the labor market, seem to be more significant than technological rigidities in this context.
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The Scandinavian Journal of Economics © 1981 The Scandinavian Journal of Economics