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A Solution to the Problem of Externalities when Agents are Well-Informed

  • Varian, H,R.

I describe a simple two-stage mechanism, the compensation mechanism, that implements efficient allocations in economic environments involving externalities. The compensation mechanism can be used to solve a wide variety of externalities problems, including the standard problem of public goods provision. It requires that that the agents know the magnitudes of the benefits and costs that they impose on other agents, but will also work with naive agents who follow a simple tatonnement.

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Paper provided by Michigan - Center for Research on Economic & Social Theory in its series Papers with number 10.

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Length: 26 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:fth:michet:10

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  1. Andreoni,J. & Varian,H., 1999. "Pre-play contracting in the prisoners' dilemma," Working papers 18, Wisconsin Madison - Social Systems.
  2. Bagnoli, Mark & Lipman, Barton L, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 583-601, October.
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