Book contents
- Frontmatter
- Contents
- List of tables and figures
- Preface
- Part I Introduction to the theory of externalities, public goods, and club goods
- Part II Externalities
- 3 Theory of externalities
- 4 Externalities, equilibrium, and optimality
- 5 Externalities and private information
- Part III Public goods
- Part IV Clubs and club goods
- Part V Applications and future directions
- References
- Author index
- Subject index
4 - Externalities, equilibrium, and optimality
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- List of tables and figures
- Preface
- Part I Introduction to the theory of externalities, public goods, and club goods
- Part II Externalities
- 3 Theory of externalities
- 4 Externalities, equilibrium, and optimality
- 5 Externalities and private information
- Part III Public goods
- Part IV Clubs and club goods
- Part V Applications and future directions
- References
- Author index
- Subject index
Summary
Our discussion in Chapter 3 of the definition and pathology of externalities has laid the groundwork that enables us now to consider some of their policy implications. Our starting point is again the competitive equilibrium model. The absence of a complete set of markets raises the possibility that a competitive equilibrium will not be Pareto-efficient, and it is the search for ways of sustaining Pareto optima that has motivated much of the literature on policy intervention to deal with externalities. In discussing this literature, we draw attention to the distinction between, on the one hand, characterizing and sustaining a Pareto optimum and, on the other hand, achieving a Pareto improvement with respect to a given initial allocation. This distinction is familiar to students of other branches of tax theory, which distinguish between de novo tax design and the reform of an existing system (e.g., Atkinson and Stiglitz 1980, pp. 382–6). However, the relationship between the number of policy instruments and the possibility of Pareto improvement has not been so clearly recognized in the externalities literature.
The most celebrated form of intervention – suggested by Pigou (1946), and clarified, extended, and criticized by countless others – consists of a system of taxes and subsidies designed to distort individuals' choices toward an optimal outcome. An alternative to such manipulation of the price system involves the enforcement of quantitative constraints such as a set of environmental standards that must be maintained.
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- Information
- The Theory of Externalities, Public Goods, and Club Goods , pp. 68 - 101Publisher: Cambridge University PressPrint publication year: 1996
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