Existence and Efficiency of a Price-Taking Equilibrium in an Economy with Public Goods, Externalities and Property Rights: A Coasian Approach

John Conley and Stefani Smith

No 403, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: We consider a general equilibrium economy with public goods and externalities. Following Boyd and Conley (1997), we treat externality markets directly instead of indirectly through Arrovian commodities. Because such direct externality markets are not subject to the nonconvexities that Starrett (1972) shows are fundamental to Arrow's externality markets, this new approach admits the use of largely standard methods to prove welfare and existence theorems in an economy with externalities. We extend the Boyd and Conley model to allow firms to benefit from public goods and be damaged by externalities, and to allow consumers to produce externalities. We state a first welfare theorem and prove the existence of a competitive equilibrium. Taken together, this can be viewed as a type of general equilibrium Coase Theorem. Considered as a special case, these theorems also represent a significant generalization of existing results for pure public goods economies.

Keywords: Externalities; Coase Theorem; Arrow commodities; pollution permits; property rights; Lindahl Equilibrium (search for similar items in EconPapers)
JEL-codes: H23 H41 (search for similar items in EconPapers)
Date: 2004-01, Revised 2004-01
New Economics Papers: this item is included in nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0403

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