My sleight of hand in treating R, as a rival good and making F homogeneous
of degree 1 in all three of K, L, and R may seem like a trifling matter in
an area of theory that depends on so many other short cuts. After all, if one is going to do violence to the complexity of economic activity by assuming that
there is an aggregate production function, how much more harm can it do to
be sloppy about the difference between rival and nonrival goods? Unfortunately,
quite a bit. The distinctions between rival and nonrival inputs, and the
distinction between excludable and nonexcludable goods, are of absolutely
fundamental importance in modeling and in policy formulation.
My sleight of hand in treating R, as a rival good and making F homogeneousof degree 1 in all three of K, L, and R may seem like a trifling matter inan area of theory that depends on so many other short cuts. After all, if one is going to do violence to the complexity of economic activity by assuming thatthere is an aggregate production function, how much more harm can it do tobe sloppy about the difference between rival and nonrival goods? Unfortunately,quite a bit. The distinctions between rival and nonrival inputs, and thedistinction between excludable and nonexcludable goods, are of absolutelyfundamental importance in modeling and in policy formulation.
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