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A reconsideration of the problem of social cost: Free riders and monopolists

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  • V.V. Chari

    (Department of Economics, University of Minnesota, 1035 Heller Hall, Minneapolis, MN 55455, USA)

  • Larry E. Jones

    (Department of Economics, University of Minnesota, 1035 Heller Hall, Minneapolis, MN 55455, USA)

Abstract

One version of the Coase Theorem is, If property rights are fully allocated, competition leads to efficient allocations. This version implies that the public goods problem can be solved by allocating property rights fully. We show that this mechanism is not likely to work well in economies with global externalities because the privatized economy is highly susceptible to strategic behavior: The free-rider problem manifests itself as a complementary monopoly problem in an associated private goods economy. Thus, our work relates the validity of the Coase Theorem to the literature on the incentives for strategic behavior in economies with complementarities.

Suggested Citation

  • V.V. Chari & Larry E. Jones, 2000. "A reconsideration of the problem of social cost: Free riders and monopolists," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(1), pages 1-22.
  • Handle: RePEc:spr:joecth:v:16:y:2000:i:1:p:1-22
    Note: Received: 12 May 1999; revised version: 9 July 1999
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    References listed on IDEAS

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    1. Groves, Theodore & Ledyard, John O, 1977. "Optimal Allocation of Public Goods: A Solution to the "Free Rider" Problem," Econometrica, Econometric Society, vol. 45(4), pages 783-809, May.
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    Citations

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    Cited by:

    1. Gary S. Becker & Kevin M. Murphy, 1994. "The Division of Labor, Coordination Costs, and Knowledge," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, Third Edition, pages 299-322, National Bureau of Economic Research, Inc.
    2. Llanes Gastón & Trento Stefano, 2011. "Anticommons and Optimal Patent Policy in a Model of Sequential Innovation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-27, August.
    3. Makowski, L. & Ostroy, J.M., 1991. "The Margin of Appropriation and an Extension of the First Theorem of Welfare Economics," Papers 388, California Davis - Institute of Governmental Affairs.
    4. Gastón Llanes & Stefano Trento, 2012. "Patent policy, patent pools, and the accumulation of claims in sequential innovation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(3), pages 703-725, August.
    5. V. V. Chari & Harold L. Cole, 1993. "A contribution to the theory of pork barrel spending," Staff Report 156, Federal Reserve Bank of Minneapolis.
    6. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series 1504, CESifo Group Munich.
    7. Harstad, Bård, 2016. "The market for conservation and other hostages," Journal of Economic Theory, Elsevier, vol. 166(C), pages 124-151.
    8. Wang, Long & Keith Murnighan, J., 2013. "The generalist bias," Organizational Behavior and Human Decision Processes, Elsevier, vol. 120(1), pages 47-61.
    9. John P. Conley & Stefani C. Smith, 2004. "Existence and Efficiency of a Price-Taking Equilibrium in an Economy with Public Goods, Externalities and Property Rights: A Coasian Approach," Vanderbilt University Department of Economics Working Papers 0403, Vanderbilt University Department of Economics, revised Jan 2004.
    10. Thomas J. Sargent, 2012. "Nobel Lecture: United States Then, Europe Now," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 1-40.
    11. Conley, John P. & Smith, Stefani C., 2005. "Coasian equilibrium," Journal of Mathematical Economics, Elsevier, vol. 41(6), pages 687-704, September.
    12. Alberto Bisin & Piero Gottardi, 2006. "Efficient Competitive Equilibria with Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 485-516, June.
    13. Bård Harstad, 2013. "The Market for Conservation and Other Hostages," CESifo Working Paper Series 4296, CESifo Group Munich.
    14. V. V. Chari, 2018. "The Role of Uncertainty and Risk in Climate Change Economics," Staff Report 576, Federal Reserve Bank of Minneapolis.

    More about this item

    Keywords

    Public goods; Externalities; Free-rider problem; Complementary monopoly.;

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D6 - Microeconomics - - Welfare Economics
    • H4 - Public Economics - - Publicly Provided Goods

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