Averting Behavior by Victims in the Presence of Public Good Characteristics

Hoan Jae Park
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Hoan Jae Park: North Carolina State University

Korean Economic Review, 1996, vol. 12, issue 2, 5-28

Abstract: This paper is basically the extension of Oates' model. It is argued that Pigouvian tax alone cannot correct the common forms of externalities with alleviation beh-aviors in the presence of public good characteristics. In our model, subsidy would be necessary to achieve Pareto-optimality. On the other hand, types of averting beh-aviors would depend upon alleviation technologT, which may classify them as three types: (a)pure private activity; (b)pure public activity; (c)impure public activity. Taking type (b), this paper examines the influence of risk attitudes on the provision of externality with averting behavior and on the proper size of a Pigouvian correction when the externality is a random variable whose distribution is affected by aver-ting behaviors. Then we conclude that an increase in risk aversion could lead to an increase in the level of externality for some plausible conditions. The influence of risk attitudes on the provision 4' averting behavior will depend on the level of emis-sion (ambient risk) individuals face, which leads to two types of averting behavior either reducing variance of consumption externality (risk-reducing behavior) or increasing variance of consumption externality (risky behavior). The effect of uncertainty on the provision of averting behavior is also examined and it is found that the provision of averting behavior is higher than if individuals were indifferent to risk.

Date: 1996
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