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Externalities — A market model failure

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  • Arild Vatn
  • Daniel Bromley

Abstract

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

Suggested Citation

  • Arild Vatn & Daniel Bromley, 1997. "Externalities — A market model failure," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 9(2), pages 135-151, March.
  • Handle: RePEc:kap:enreec:v:9:y:1997:i:2:p:135-151
    DOI: 10.1007/BF02441375
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    References listed on IDEAS

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    1. 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.
    2. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-322, June.
    3. 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.
    4. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, March.
    5. Perrings,Charles, 1987. "Economy and Environment," Cambridge Books, Cambridge University Press, number 9780521340816, May.
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    Citations

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    Cited by:

    1. Nilsson, Fredrik Olof Laurentius, 2008. "Applied economics of multifunctional agriculture," Department of Economics publications 1768, Swedish University of Agricultural Sciences, Department of Economics.
    2. 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.
    3. 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).
    4. Greiner, Romy & Cacho, Oscar, 2001. "On the efficient use of a catchment's land and water resources: dryland salinization in Australia," Ecological Economics, Elsevier, vol. 38(3), pages 441-458, September.
    5. 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.
    6. 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.
    7. repec:bla:srbeha:v:34:y:2017:i:5:p:637-642 is not listed on IDEAS
    8. Remig, Moritz C., 2017. "Structured pluralism in ecological economics — A reply to Peter Söderbaum's commentary," Ecological Economics, Elsevier, vol. 131(C), pages 533-537.
    9. Ceddia, Michele Graziano & Bartlett, Mark & Lucia, Caterina De & Perrings, Charles, 2011. "On the regulation of spatial externalities: coexistence between GM and conventional crops in the EU and the ‘newcomer principle’," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 55(1), March.
    10. Daniel Bromley, 2004. "Reconsidering Environmental Policy: Prescriptive Consequentialism and Volitional Pragmatism," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 28(1), pages 73-99, May.
    11. 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.
    12. Vatn, Arild, 2010. "An institutional analysis of payments for environmental services," Ecological Economics, Elsevier, vol. 69(6), pages 1245-1252, April.
    13. Remig, Moritz C., 2015. "Unraveling the veil of fuzziness: A thick description of sustainability economics," Ecological Economics, Elsevier, vol. 109(C), pages 194-202.

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