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Consumption Externalities and Pigouvian Ranking -- A Generalized Cobb-Douglas Example

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Wendner, Ronald

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Abstract

This paper analyzes the impact of consumption externalities on the ``Pigouvian ranking,'' according to which the second-best level of public good provision is \emph{smaller} than the first-best level. Consumption externalities introduce exceptions to the Pigouvian ranking. Two necessary and sufficient conditions for reversal of the Pigouvian ranking are identified, when preferences for private goods (Cobb-Douglas) and the public good are weakly separable: (i) consumption generates a \emph{negative} externality, (ii) utility is not too concave in the subutility of private goods. If preferences are \emph{strongly} separable in the public good, the Pigouvian ranking is reversed if and only if the second-best consumption price is lower than the corrective (Pigouvian) consumption price.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8540.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:8540

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Related research
Keywords: consumption externality public good provision first-best second-best Pigouvian ranking

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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  6. Ming Chang, 2000. "Rules and Levels in the Provision of Public Goods: The Role of Complementarities between the public Good and Taxed Commodities," International Tax and Public Finance, Springer, vol. 7(1), pages 83-91, February. [Downloadable!] (restricted)
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  8. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Oxford University Press, vol. 22(2), pages 227-43, April.
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  14. Olof Johansson-Stenman & Fredrik Carlsson & Dinky Daruvala, 2002. "Measuring Future Grandparents" Preferences for Equality and Relative Standing," Economic Journal, Royal Economic Society, vol. 112(479), pages 362-383, April. [Downloadable!] (restricted)
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