A Solution to the Problem of Externalities when Agents are Well-Informed
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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|Date of creation:||1991|
|Date of revision:|
|Contact details of provider:|| Postal: UNIVERSITY OF MICHIGAN, DEPARTMENT OF ECONOMICS CENTER FOR RESEARCH ON ECONOMIC AND SOCIAL THEORY, ANN ARBOR MICHIGAN U.S.A.|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark Bagnoli & Barton L. Lipman, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," Review of Economic Studies, Oxford University Press, vol. 56(4), pages 583-601.
- Andreoni,J. & Varian,H., 1999. "Pre-play contracting in the prisoners' dilemma," Working papers 18, Wisconsin Madison - Social Systems.
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