IDEAS home Printed from https://ideas.repec.org/p/wrk/warwec/756.html
   My bibliography  Save this paper

Externalities and Fundamental Nonconvexities : A Reconciliation of Approaches to General Equilibrium Externality Modelling and Implications for Decentralization

Author

Listed:
  • Murty, Sushama

    (Department of Economics, University of Warwick)

Abstract

By distinguishing between producible and nonproducible public goods, we are able to propose a general equilibrium model with externalities that distinguishes between and encompasses both the Starrett [1972] and Boyd and Conley [1997] type external effects. We show that while nonconvexities remain fundamental whenever the Starrett type external effects are present, these are not caused by the type discussed in Boyd and Conley. Secondly, we find that the notion of a “public competitive equilibrium” for public goods found in Foley [1967, 1970] allows a decentralized mechanism, based on both price and quantity signals, for economies with externalities, which is able to restore the equivalence between equilibrium and efficiency even in the presence of nonconvexities. This is in contrast to equilibrium notions based purely on price signals such as the Pigouvian taxes

Suggested Citation

  • Murty, Sushama, 2006. "Externalities and Fundamental Nonconvexities : A Reconciliation of Approaches to General Equilibrium Externality Modelling and Implications for Decentralization," The Warwick Economics Research Paper Series (TWERPS) 756, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:756
    as

    Download full text from publisher

    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2006/twerp_756.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. McFadden, Daniel, 1978. "Cost, Revenue, and Profit Functions," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.),Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1, McMaster University Archive for the History of Economic Thought.
    2. Cornet, B., 1984. "Existence of equilibria in economies with increasing returns," LIDAM Discussion Papers CORE 1984007, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Murty, Sushama & Russell, R. Robert, 2010. "On modeling pollution-generating technologies," Economic Research Papers 271176, University of Warwick - Department of Economics.
    4. Paul Beaudry & Charles Blackorby & Dezsö Szalay, 2009. "Taxes and Employment Subsidies in Optimal Redistribution Programs," American Economic Review, American Economic Association, vol. 99(1), pages 216-242, March.
    5. Hurwicz, Leonid, 1999. "Revisiting Externalities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(2), pages 225-245.
    6. Heal, G.M., 1997. "The Economics of Increasing Returns," Papers 97-20, Columbia - Graduate School of Business.
    7. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    8. Foley, Duncan K, 1970. "Lindahl's Solution and the Core of an Economy with Public Goods," Econometrica, Econometric Society, vol. 38(1), pages 66-72, January.
    9. Guesnerie, Roger, 1979. "General statements on second best pareto optimality," Journal of Mathematical Economics, Elsevier, vol. 6(2), pages 169-194, July.
    10. Donald J. Brown & Geoffrey Heal, 1979. "Equity, Efficiency and Increasing Returns," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(4), pages 571-585.
    11. Baumol, William J & Bradford, David F, 1972. "Detrimental Externalities and Non-Convexity of the Production Set," Economica, London School of Economics and Political Science, vol. 39(154), pages 160-176, May.
    12. M. Ali Khan & Rajiv Vohra, 1987. "An Extension of the Second Welfare Theorem to Economies with Nonconvexities and Public Goods," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 223-241.
    13. Starrett, David A., 1972. "Fundamental nonconvexities in the theory of externalities," Journal of Economic Theory, Elsevier, vol. 4(2), pages 180-199, April.
    14. S. Ghosal & H. M. Polemarchakis, 1999. "Exchange and optimality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(3), pages 629-642.
    15. Conley, John P. & Smith, Stefani C., 2005. "Coasian equilibrium," Journal of Mathematical Economics, Elsevier, vol. 41(6), pages 687-704, September.
    16. Calsamiglia, Xavier, 1977. "Decentralized resource allocation and increasing returns," Journal of Economic Theory, Elsevier, vol. 14(2), pages 263-283, April.
    17. Fuss, Melvyn & McFadden, Daniel (ed.), 1978. "Production Economics: A Dual Approach to Theory and Applications," Elsevier Monographs, Elsevier, edition 1, number 9780444850133.
    18. Milleron, Jean-Claude, 1972. "Theory of value with public goods: A survey article," Journal of Economic Theory, Elsevier, vol. 5(3), pages 419-477, December.
    19. Tulkens, Henry & Schoumaker, Francoise, 1975. "Stability analysis of an effluent charge and the `polluters pay' principle," Journal of Public Economics, Elsevier, vol. 4(3), pages 245-269, August.
    20. Bonnisseau, Jean-Marc & Cornet, Bernard, 1990. "Existence of Marginal Cost Pricing Equilibria: The Nonsmooth Case," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 685-708, August.
    21. Varian, Hal R., 1995. "Coase, competition, and compensation," Japan and the World Economy, Elsevier, vol. 7(1), pages 13-27, May.
    22. Fuss, Melvyn & McFadden, Daniel, 1978. "Production Economics: A Dual Approach to Theory and Applications (I): The Theory of Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 1, number fuss1978.
    23. Beato, Paulina & Mas-Colell, Andreu, 1985. "On marginal cost pricing with given tax-subsidy rules," Journal of Economic Theory, Elsevier, vol. 37(2), pages 356-365, December.
    24. Quinzii, Martine, 1993. "Increasing Returns and Economic Efficiency," OUP Catalogue, Oxford University Press, number 9780195065534, Decembrie.
    25. Boyd, John III & Conley, John P., 1997. "Fundamental Nonconvexities in Arrovian Markets and a Coasian Solution to the Problem of Externalities," Journal of Economic Theory, Elsevier, vol. 72(2), pages 388-407, February.
    26. Hurwicz, Leonid, 1995. "What is the Coase Theorem?," Japan and the World Economy, Elsevier, vol. 7(1), pages 49-74, May.
    27. Guesnerie,Roger, 1998. "A Contribution to the Pure Theory of Taxation," Cambridge Books, Cambridge University Press, number 9780521629560, November.
    28. Fuss, Melvyn & McFadden, Daniel, 1978. "Production Economics: A Dual Approach to Theory and Applications (II): Applications of the Theory of Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 2, number fuss1978a.
    29. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-322, June.
    30. Geoffrey Heal (ed.), 1999. "The Economics of Increasing Returns," Books, Edward Elgar Publishing, number 1041.
    31. Otani, Yoshihiko & Sicilian, Joseph, 1977. "Externalities and problems of nonconvexity and overhead costs in welfare economics," Journal of Economic Theory, Elsevier, vol. 14(2), pages 239-251, April.
    32. Paulina Beato, 1982. "The Existence of Marginal Cost Pricing Equilibria with Increasing Returns," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 669-688.
    33. Guesnerie, Roger, 1975. "Pareto Optimality in Non-Convex Economies," Econometrica, Econometric Society, vol. 43(1), pages 1-29, January.
    34. Beaudry, Paul & Blackorby, Charles & Szalay, Dezso, 2006. "Taxes and Employment Subsidies in Optimal Redistribution Programs (Revised Version)," The Warwick Economics Research Paper Series (TWERPS) 779, University of Warwick, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Murty, Sushama & Russell, R. Robert, 2010. "On modeling pollution-generating technologies," Economic Research Papers 271176, University of Warwick - Department of Economics.
    2. Kenneth Rødseth, 2014. "Efficiency measurement when producers control pollutants: a non-parametric approach," Journal of Productivity Analysis, Springer, vol. 42(2), pages 211-223, October.
    3. Monique Florenzano, 2009. "Walras-Lindahl-Wicksell: What equilibrium concept for public goods provision ? I - The convex case," Post-Print halshs-00367867, HAL.
    4. Murty, Sushama & Robert Russell, R. & Levkoff, Steven B., 2012. "On modeling pollution-generating technologies," Journal of Environmental Economics and Management, Elsevier, vol. 64(1), pages 117-135.
    5. Sushama Murty & R. Robert Russell, "undated". "Bad Outputs," Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi Discussion Papers 17-06, Centre for International Trade and Development, Jawaharlal Nehru University, New Delhi, India.
    6. Murty, Sushama, 2010. "On the theory of a firm : The case of by-production of emissions," The Warwick Economics Research Paper Series (TWERPS) 934, University of Warwick, Department of Economics.
    7. Jeanneaux, Philippe & Latruffe, Laure, 2016. "Modelling pollution-generating technologies in performance benchmarking: Recent developments, limits and future prospects in the nonparametric frameworkAuthor-Name: Dakpo, K. Hervé," European Journal of Operational Research, Elsevier, vol. 250(2), pages 347-359.
    8. Monique Florenzano, 2010. "Government and the provision of public goods:from equilibrium models to mechanismdesign," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 17(4), pages 1047-1077.
    9. Sushama Murty & R. Robert Russell, 2018. "Modeling emission-generating technologies: reconciliation of axiomatic and by-production approaches," Empirical Economics, Springer, vol. 54(1), pages 7-30, February.
    10. K Hervé Dakpo, 2016. "On modeling pollution-generating technologies: a new formulation of the by-production approach," Working Papers SMART 16-06, INRAE UMR SMART.
    11. Sushama Murty, 2012. "Microfoundations for the Environmental Kuznets Curve: Invoking By-Production, Normality and Inferiority of Emissions," Discussion Papers 1203, University of Exeter, Department of Economics.
    12. K Hervé Dakpo & Philippe Jeanneaux & Laure Latruffe, 2014. "Inclusion of undesirable outputs in production technology modeling:The case of greenhouse gas emissions in French meat sheep farming," Working Papers SMART 14-08, INRAE UMR SMART.
    13. A. Abad & P. Ravelojaona, 2017. "Exponential environmental productivity index and indicators," Journal of Productivity Analysis, Springer, vol. 48(2), pages 147-166, December.
    14. Michail Tsagris & Vangelis Tzouvelekas, 2022. "Nitrate leaching and efficiency measurement in intensive farming systems: A parametric by‐production technology approach," Agricultural Economics, International Association of Agricultural Economists, vol. 53(4), pages 633-647, July.
    15. Monique Florenzano, 2009. "Walras-Lindahl-Wicksell: What equilibrium concept for public goods provision," Working Papers halshs-00531434, HAL.
    16. Harald Dyckhoff, 2023. "Proper modelling of industrial production systems with unintended outputs: a different perspective," Journal of Productivity Analysis, Springer, vol. 59(2), pages 173-188, April.
    17. Abad, Arnaud & Briec, Walter, 2019. "On the axiomatic of pollution-generating technologies: Non-parametric production analysis," European Journal of Operational Research, Elsevier, vol. 277(1), pages 377-390.
    18. Monique Florenzano, 2009. "From equilibrium models to mechanism design: On the place and the role of government in the public goods provision analysis in the second part of the twentieth century," Post-Print halshs-00367859, HAL.
    19. Sushama Murty, 2012. "On the properties of an emission-generating technology and its parametric representation," Discussion Papers 1202, University of Exeter, Department of Economics.
    20. Juan Aparicio & Magdalena Kapelko & Lidia Ortiz, 2021. "Modelling environmental inefficiency under a quota system," Operational Research, Springer, vol. 21(2), pages 1097-1124, June.
    21. Dakpo, K Hervé, 2016. "On modeling pollution-generating technologies: a new formulation of the by-production approach," Working Papers 245191, Institut National de la recherche Agronomique (INRA), Departement Sciences Sociales, Agriculture et Alimentation, Espace et Environnement (SAE2).
    22. Sushama Murty, 2015. "On the properties of an emission-generating technology and its parametric representation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(2), pages 243-282, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonio Villar, 1994. "Existence and efficiency of equilibrium in economics with increasing returns to scale: an exposition," Investigaciones Economicas, Fundación SEPI, vol. 18(2), pages 205-243, May.
    2. Sushama Murty, 2012. "On the properties of an emission-generating technology and its parametric representation," Discussion Papers 1202, University of Exeter, Department of Economics.
    3. 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.
    4. Steven G. Medema, 2020. "The Coase Theorem at Sixty," Journal of Economic Literature, American Economic Association, vol. 58(4), pages 1045-1128, December.
    5. Conley, John P. & Smith, Stefani C., 2005. "Coasian equilibrium," Journal of Mathematical Economics, Elsevier, vol. 41(6), pages 687-704, September.
    6. Élodie Bertrand, 2006. "La thèse d'efficience du « théorème de Coase ». Quelle critique de la microéconomie ?," Revue économique, Presses de Sciences-Po, vol. 57(5), pages 983-1007.
    7. Jean-Marc Bonnisseau, 2000. "The Marginal Pricing Rule in Economies with Infinitely Many Commodities," Econometric Society World Congress 2000 Contributed Papers 0262, Econometric Society.
    8. Gaël Giraud & Cécile Renouard, 2011. "In search of an alternative to shareholder value maximization," Post-Print hal-00609153, HAL.
    9. Monique Florenzano, 2009. "Walras-Lindahl-Wicksell: What equilibrium concept for public goods provision," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00531434, HAL.
    10. Jean Paul Chavas, 2015. "Coase Revisited: Economic Efficiency under Externalities, Transaction Costs, and Nonconvexity," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(4), pages 709-734, December.
    11. Guesnerie, R., 1995. "The genealogy of modern theoretical public economics: From first best to second best," European Economic Review, Elsevier, vol. 39(3-4), pages 353-381, April.
    12. Forsund, Finn R., 2009. "Good Modelling of Bad Outputs: Pollution and Multiple-Output Production," International Review of Environmental and Resource Economics, now publishers, vol. 3(1), pages 1-38, August.
    13. Walter Briec & Kristiaan Kerstens & Ignace Van de Woestyne, 2016. "Congestion in production correspondences," Journal of Economics, Springer, vol. 119(1), pages 65-90, September.
    14. Sushama Murty, 2014. "Necessary and sufficient conditions for an environmental Kuznets curve with some illustrative examples," Discussion Papers 1407, University of Exeter, Department of Economics.
    15. Boyd, John III & Conley, John P., 1997. "Fundamental Nonconvexities in Arrovian Markets and a Coasian Solution to the Problem of Externalities," Journal of Economic Theory, Elsevier, vol. 72(2), pages 388-407, February.
    16. Kuosmanen, Timo, 2001. "DEA with efficiency classification preserving conditional convexity," European Journal of Operational Research, Elsevier, vol. 132(2), pages 326-342, July.
    17. Elodie Bertrand, 2019. "Much ado about nothing? The controversy over the validity of the Coase theorem," Post-Print hal-03479468, HAL.
    18. A. Abad & P. Ravelojaona, 2017. "Exponential environmental productivity index and indicators," Journal of Productivity Analysis, Springer, vol. 48(2), pages 147-166, December.
    19. Peifang Yang & Daniel T. Kaffine, 2016. "Community-Based Tradable Permits for Localized Pollution," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(4), pages 773-788, December.
    20. Deb Kusum Das, 2003. "Manufacturing productivity under varying trade regmies: India in the 1980s and 1990s," Indian Council for Research on International Economic Relations, New Delhi Working Papers 107, Indian Council for Research on International Economic Relations, New Delhi, India.

    More about this item

    Keywords

    externalities ; fundamental nonconvexities ; Clarke’s normal and tangent cones ; public goods;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wrk:warwec:756. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Margaret Nash (email available below). General contact details of provider: https://edirc.repec.org/data/dewaruk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.