Non-Separability and Substitutability

The design and implementation of environmental policy often involves more than one pollutant, and must consider pollution as a byproduct of the production of marketable output. In this paper, we test the implicit assumption in the empirical literature that (1) production of marketable output, pollution, and abatement are separable, and (2) different pollutants can be abated separately. Using unique plant-level data in India, we reject the null hypotheses of separability between marketable output and pollutants, and between different pollutants. Firms must incur abatement costs for reducing pollution levels. In addition, complement and substitute relationships between water pollutants are demonstrated with statistical significance. JEL Classification: Q2; L5.