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

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  • V. V. Chari
  • Larry E. Jones

Abstract

We examine the validity of one version of the Coase Theorem: In any economy in which property rights are fully allocated, competition will lead to efficient allocations. This version of the theorem implies that the public goods problem can be solved by allocating property rights fully and letting markets do their work. We show that this mechanism is not likely to work well in economies with either pure public goods or global externalities. The reason is that the privatized economy turns out to be highly susceptible to strategic behavior in that the free-rider problem in public goods economies manifests itself as a complementary monopoly problem in the private goods economy. If the public goods or externalities are local in nature, however, market mechanisms are likely to work well. ; Our work is related to the recent literature on the foundations of Walrasian equilibrium in that it highlights a relationship among the appropriateness of Walrasian equilibrium as a solution concept, the incentives for strategic play, the aggregate level of complementarities in the economy, and the problem of coordinating economic activity.

Suggested Citation

  • V. V. Chari & Larry E. Jones, 1991. "A reconsideration of the problem of social cost: free riders and monopolists," Staff Report 142, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:142
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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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    7. Mas-Colell, Andreu, 1975. "A model of equilibrium with differentiated commodities," Journal of Mathematical Economics, Elsevier, vol. 2(2), pages 263-295.
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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 (3rd Edition), pages 299-322 National Bureau of Economic Research, Inc.
    2. 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.
    3. 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), pages 703-725.
    4. 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.
    5. 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.
    6. Conley, John P. & Smith, Stefani C., 2005. "Coasian equilibrium," Journal of Mathematical Economics, Elsevier, vol. 41(6), pages 687-704, September.
    7. V. V. Chari & Harold L. Cole, 1993. "A contribution to the theory of pork barrel spending," Staff Report 156, Federal Reserve Bank of Minneapolis.
    8. 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.
    9. Harstad, Bård, 2016. "The market for conservation and other hostages," Journal of Economic Theory, Elsevier, vol. 166(C), pages 124-151.
    10. Wang, Long & Keith Murnighan, J., 2013. "The generalist bias," Organizational Behavior and Human Decision Processes, Elsevier, vol. 120(1), pages 47-61.

    More about this item

    Keywords

    Economics;

    JEL classification:

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

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