Pricing Pollution and Other Negative Externalities

Richard A. Tybout

Bell Journal of Economics, 1972, vol. 3, issue 1, 252-266

Abstract: Equilibrium conditions are described for pollution or "externalities of production" treated as substitute products. The results are contrasted with those based on traditionally assumed fixed proportions between product and waste outputs. The "neutrality of bribery or compensation" argument is refuted. With linear homogeneous production functions, compensation leads to exhaustion of product; bribery does not. Only certain selected production functions and conditions can lead to positive aggregate profits in a bribe-paying industry. Requirements are described. The analysis is applied to a number of related issues: the blackmail problem, third party pricing, and public goods aspects.

Date: 1972
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