Understanding the Importance of the Law of Entropy Through the Analysis of the Substitution Elasticities Between Energy and other Inputs in Selected Industries of Iran

The second law of thermodynamics or the law of Entropy is a warning to economic activists and economic policymakers who pursue the goal of unlimited economic growth without considering the capacity of the environment. The main goal of this paper is to answer the question whether energy input is a substitute for capital and other inputs in the automotive, chemical and food industries. For this purpose, while using the data of companies indexed in Tehran Stock Exchange for the period of 1386-1400 Hs, the Translog cost function was estimated. Substitution of inputs in the selected industries was judged based on price elasticities and Allen's elasticity of substitution. Contrary to theoretical expectations, the results showed that the cross elasticities and Allen's substitution elasticities between electricity and other energy carriers are negative and therefore these inputs are not substitutes for electricity. In other words, in the production process of the aforementioned industries, electricity and other energy inputs are needed. Also, the findings of this research showed that Allen's elasticity of substitution between electricity and capital is negative, and therefore these two inputs are complementary to each other. Due to the fact that it is not possible to replace electricity with other inputs in the selected industries, it can be concluded that the growth of these industries regardless of the capacity of the environment will bring harmful effects on the environment through energy supply for these industries.