Thus, the example that R-S offer in their next section is crucial to their argument.
It is not the derived demand of a competitive farm sector, which is surely what R-S intended.
This observation now fully explains why R-S got their paradoxical result.
Second, the sign of this term is negative, not positive as R-S claim.
5) This is not surprising and is the basic result in the paper by Spencer and Brander cited by R-S.
In contrast, R-S consider a second-best level of investment (not prices) where second-best conditions are dictated by lumpiness of investment, by monopoly supply of the input, and by investment decisions made by central authority using grants from outside the economy.
R-S further impose two constraints, again from the point of view of the authority: that rate of return will not fall below its opportunity cost and that the final output market will not be thrown into disequilibrium by its decisions.
He is working in a standard Ramsey-pricing framework; R-S are not.
When R-S say that "producers will set the marginal productivity of water equal to [p.