ABSTRACT
A rise in energy prices thus has only a small direct effect on economic activity, even if no other factors of production are substituted for en ergy. Any factor substitution that occurs further reduces the adverse effects of higher energy costs. This chapter explores alternative techni cal substitution possibilities and shows that substitution sometimes has a net positive effect on output and employment. These diverse substitution possibilities may explain differences in the behavior of in dividual industrial sectors and how changes in the mix of inputs and outputs might affect overall factor productivity. The possibility that factor markets do not adjust efficiently, as assumed in the analysis in this chapter, is deferred to the next two chapters.
