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.
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Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number
0403.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Aivazian, Varouj A & Callen, Jeffrey L & Lipnowski, Irwin, 1987.
"The Coase Theorem and Coalitional Stability,"
Economica,
London School of Economics and Political Science, vol. 54(216), pages 517-20, November.
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