The Possibility of Oversupply with External Economies
Until fairly recently, the Pigovian position that activities generating unpriced external economies would be undersupplied was universally accepted. It rested on the simple assertion that marginal social benefits exceeded marginal private benefits of the activity, and that, by equating the latter to the price,the marginal social benefit would exceed the price and the activity should be expanded. As a result in this paper, we have analysed the conditions under which oversupply could occur in the presence of external economies. In doing so, we have shown Baumol's analysis to be based upon a misleading definition of "externality". Furthermore,we have shown that the results arrived at by Vincent were faulty for several reasons. Also, the correct partial method is shown, but even it gives incorrect results. What is required is a simultaneous equation method to determine changes in a and b,such as is given in this paper.
|Date of creation:||Oct 1971|
|Contact details of provider:|| Postal: Kingston, Ontario, K7L 3N6|
Phone: (613) 533-2250
Fax: (613) 533-6668
Web page: http://qed.econ.queensu.ca/
More information through EDIRC
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.:
- Olson, Mancur & Zeckhauser, Richard, 1970. "The Efficient Production of External Economies," American Economic Review, American Economic Association, vol. 60(3), pages 512-517, June.
- Vincent, Phillip E, 1969. "Reciprocal Externalities and Optimal Input and Output Levels," American Economic Review, American Economic Association, vol. 59(5), pages 976-984, December.
When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:63. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.