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Externalities — A market model failure


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  • Arild Vatn
  • Daniel Bromley
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    We focus here on a set of conceptual problems related to the accepted theory of externalities. We are primarily concerned with difficulties that arise when a theoretical system is extended beyond its logical domain. This is the practice in externality theory when the market model assuming independent agents is used to analyze physical interdependency. The different kinds of dependencies obscure the standard use of the Paretian analysis, as the issues of rights and efficiency are mixed up. The creation of emissions and the creation of externalities are further not held apart producing flows in the efficiency evaluations. Due to the interdependencies involved, actions of both emitter and victim must be taken into account while searching for efficient policies. Finally, we analyze the interrelationships between what is termed the internal structure of the market model and the annexed sphere of externalities. We conclude that the accepted policy prescriptions both assume and demand no interrelationships between these two spheres. We find the assumption unrealistic and inconsistent as concerns the basic foundations of the market model. There are two main traditions addressing externalities — the Coasean and the Pigovian. This paper shows that both are vulnerable to the above critique. Thus the presumption that externality theory is now settled and coherent is seen to be without theoretical support. Copyright Kluwer Academic Publishers 1997

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    Bibliographic Info

    Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

    Volume (Year): 9 (1997)
    Issue (Month): 2 (March)
    Pages: 135-151

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    Handle: RePEc:kap:enreec:v:9:y:1997:i:2:p:135-151

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    Keywords: externalities; market model; rights; Pigovian taxes; Coase Theorem; social costs;


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Ronald C. Griffin, 1995. "On the Meaning of Economic Efficiency in Policy Analysis," Land Economics, University of Wisconsin Press, vol. 71(1), pages 1-15.
    2. Vatn Arild & Bromley Daniel W., 1994. "Choices without Prices without Apologies," Journal of Environmental Economics and Management, Elsevier, vol. 26(2), pages 129-148, March.
    3. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-22, June.
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    Cited by:
    1. Mumbunan, Sonny & Ring, Irene & Lenk, Thomas, 2012. "Ecological fiscal transfers at the provincial level in Indonesia," UFZ Discussion Papers 06/2012, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    2. Daniel W. BROMLEY, 1996. "The Environmental Implications Of Agriculture," Staff Papers 401, University of Wisconsin Madison, AAE.
    3. Vatn, Arild, 2010. "An institutional analysis of payments for environmental services," Ecological Economics, Elsevier, vol. 69(6), pages 1245-1252, April.
    4. Zylicz, Tomasz, 2010. "Goals and Principles of Environmental Policy," International Review of Environmental and Resource Economics, now publishers, vol. 3(4), pages 299-334, May.
    5. Mbatha, C. Nhlanhla & Antrobus, G.G., 2008. "Institutions and economic research: a case of location externalities on agricultural resource allocation in the Kat River basin, South Africa," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 47(4), December.
    6. Daniel Bromley, 2004. "Reconsidering Environmental Policy: Prescriptive Consequentialism and Volitional Pragmatism," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 28(1), pages 73-99, May.
    7. Daniel W. Bromley, 1996. "The Environmental Implications of Agriculture," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 401, Wisconsin-Madison Agricultural and Applied Economics Department.
    8. Ana Iolanda Voda & Catalin Chiriac, 2012. "An inexhaustive criticism of the standard economic theory from an Austrian perspective related to growth and development," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 3(1), pages 195-202, July.


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