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Externalities and Asymmetric Information

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  • Jeremy Greenwood
  • R Preston McAfee

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.
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Suggested Citation

  • Jeremy Greenwood & R Preston McAfee, 1989. "Externalities and Asymmetric Information," University of Western Ontario, Departmental Research Report Series 8914, University of Western Ontario, Department of Economics.
    • Handle: RePEc:uwo:uwowop:8914
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    File URL: https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1479&context=economicsresrpt
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    Cited by:

    1. Chung-Huang Huang, 1996. "Effectiveness of environmental regulations under imperfect enforcement and the firm's avoidance behavior," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 8(2), pages 183-204, September.
    2. Roberto Burguet & R. McAfee, 2009. "License prices for financially constrained firms," Journal of Regulatory Economics, Springer, vol. 36(2), pages 178-198, October.
    3. Roberton Williams, 2002. "Prices vs. Quantities vs. Tradable Quantities," NBER Working Papers 9283, National Bureau of Economic Research, Inc.
    4. Greenwood, Jeremy & Huffman, Gregory W., 1991. "Tax analysis in a real-business-cycle model : On measuring Harberger triangles and Okun gaps," Journal of Monetary Economics, Elsevier, vol. 27(2), pages 167-190, April.
    5. Petra Nieken & Patrick W. Schmitz, 2023. "Contracting under asymmetric information and externalities: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 26(5), pages 989-1021, November.
    6. Michel Poitevin, 1995. "Contract Renegotiation and Organizational Design," Discussion Papers 1135, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Favard, P. & Mirabel, F. & Poudou, J.-C., 2002. "Funding for Universal Service Obligations in Electricity Sector : the case of green power development," Cahiers du CREDEN (CREDEN Working Papers) 02.07.33, CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1.
    8. Kollmann, Robert, 1991. ""Essays on International Business Cycles", PhD thesis, Economics Department, University of Chicago, 1991," MPRA Paper 69905, University Library of Munich, Germany.
    9. Tapas Kundu & Tore Nilssen, 2020. "Delegation of Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 68(3), pages 445-482, September.
    10. Jin-Li Hu & Chung-Huang Huang & Wei-Kai Chu, 2004. "Bribery, hierarchical government, and incomplete environmental enforcement," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 6(3), pages 177-196, September.
    11. Ratul Lahkar & Vinay Ramani, 2022. "An Evolutionary Approach to Pollution Control in Competitive Markets," Dynamic Games and Applications, Springer, vol. 12(3), pages 872-896, September.
    12. Ravi Bapna & Paulo Goes & Alok Gupta, 2005. "Pricing and Allocation for Quality-Differentiated Online Services," Management Science, INFORMS, vol. 51(7), pages 1141-1150, July.
    13. Peter Klibanoff & Michel Poitevin, 2022. "A theory of (de)centralization," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(3), pages 417-451, June.
    14. Myeonghwan Cho, 2013. "Externality and information asymmetry in the production of local public goods," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(2), pages 177-201, June.

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