Inducing Efficiency: Externalities, Missing Markets, and the Coase Theorem

John Payne Bigelow

International Economic Review, 1993, vol. 34, issue 2, 335-46

Abstract: The capacity of side-payments to induce an efficient outcome, as predicted by the Coase theorem, is studied. Side-payments are formally introduced in a bimatrix game involving externalities and the resulting equilibrium is called.an induced equilibrium. When induced equilibria exist, they weakly Pareto-dominate a Nash equilibrium of the original game without side-payments. When, because of externalities, one market is missing, an induced equilibrium always exists, is uniquely valued, and is Pareto-efficient. When more than one market is missing, induced equilibria may not exist, may be Pareto-inefficient, and may be Pareto ranked. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1993
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