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# Consumption Externalities and Pigouvian Ranking -- A Generalized Cobb-Douglas Example

## Author

Listed:
• Wendner, Ronald

## Abstract

This paper analyzes the impact of consumption externalities on the Pigouvian ranking,'' according to which the second-best level of public good provision is \emph{smaller} than the first-best level. Consumption externalities introduce exceptions to the Pigouvian ranking. Two necessary and sufficient conditions for reversal of the Pigouvian ranking are identified, when preferences for private goods (Cobb-Douglas) and the public good are weakly separable: (i) consumption generates a \emph{negative} externality, (ii) utility is not too concave in the subutility of private goods. If preferences are \emph{strongly} separable in the public good, the Pigouvian ranking is reversed if and only if the second-best consumption price is lower than the corrective (Pigouvian) consumption price.

## Suggested Citation

• Wendner, Ronald, 2008. "Consumption Externalities and Pigouvian Ranking -- A Generalized Cobb-Douglas Example," MPRA Paper 8540, University Library of Munich, Germany.
• Handle: RePEc:pra:mprapa:8540
as

File URL: https://mpra.ub.uni-muenchen.de/8540/1/MPRA_paper_8540.pdf
File Function: original version

## References listed on IDEAS

as
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Full references (including those not matched with items on IDEAS)

### Keywords

consumption externality public good provision; first-best; second-best; Pigouvian ranking;

### JEL classification:

• D62 - Microeconomics - - Welfare Economics - - - Externalities
• H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
• H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

### NEP fields

This paper has been announced in the following NEP Reports:

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