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Externalities and Asymmetric Information

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  • Greenwood, Jeremy
  • McAfee, R Preston

Abstract

A reconsideration of the Pigovian theory of regulating externalities via taxation is undertaken for environments with private information. The presence of private information may have no effect on the social optimum; but when it has an impact, it is to cause a group of different agents to share the same production or consumption levels. The model developed provides an appealing characterization of when such situations transpire; they occur when the individuals who desire most to engage in some activity are the ones who society least wants to participate. Since such instances could potentially be regulated by the imposition of quantity controls, this may explain authorities' apparent predilection for quantity limits rather than tax-cum-subsidy schemes to manage many externalities. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 106 (1991)
Issue (Month): 1 (February)
Pages: 103-21

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Handle: RePEc:tpr:qjecon:v:106:y:1991:i:1:p:103-21

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Cited by:
  1. Michel Poitevin, 1995. "Contract Renegotiation and Organizational Design," CIRANO Working Papers 95s-03, CIRANO.
  2. Favard, P. & Mirabel, F. & Poudou, J.-C., 2002. "Funding for Universal Service Obligations in Electricity Sector: the case of green power development," Cahiers du LASER (LASER Working Papers) 2002.06, LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1.
  3. Roberto Burguet & R. Preston McAfee, 2008. "License Prices for Financially Constrained Firms," Working Papers 351, Barcelona Graduate School of Economics.
  4. Chung-Huang Huang, 1996. "Effectiveness of environmental regulations under imperfect enforcement and the firm's avoidance behavior," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 8(2), pages 183-204, September.
  5. Roberton Williams, 2002. "Prices vs. Quantities vs. Tradable Quantities," NBER Working Papers 9283, National Bureau of Economic Research, Inc.

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