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A Solution to the Problem of Externalities when Agents are Well-Informed}

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Author Info
Hal R. Varian (University of Michigan, Dept of Economics)

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Abstract

I describe a simple two-stage mechanism, the compensation mechanism, that implements efficient allocations in economic environments involving externalities. The compensation mechanism can be used to solve a wide variety of externalities problems, including the standard problem of public goods provision. It requires that that the agents know the magnitudes of the benefits and costs that they impose on other agents, but will also work with naive agents who follow a simple tatonnement.

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Paper provided by EconWPA in its series Microeconomics with number 9401003.

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Date of creation: 18 Jan 1994
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Handle: RePEc:wpa:wuwpmi:9401003

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Find related papers by JEL classification:
D1 - Microeconomics - - Household Behavior
D2 - Microeconomics - - Production and Organizations
D3 - Microeconomics - - Distribution
D4 - Microeconomics - - Market Structure and Pricing

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  1. Bagnoli, Mark & Lipman, Barton L, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," Review of Economic Studies, Blackwell Publishing, vol. 56(4), pages 583-601, October. [Downloadable!] (restricted)
  2. repec:att:wimass:19199918 is not listed on IDEAS
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  1. Breitscheidel, Jörg, 2005. "Self-financing Tax/Subsidy Mechanisms in Environmental Regulation with Many Firms," ZEW Discussion Papers 05-87, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  2. Yasuyo Hamaguchi & Satoshi Mitani & Tatsuyoshi Saijo, 2004. "Does the Varian Mechanism Work? -Emissions Trading as an Example," Discussion papers 04009, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  3. Hikaru Ogawa & David Wildasin, 2007. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," Working Papers 2007-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
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  4. Roland Kirstein, . "Anti-Teilen in Teams," German Working Papers in Law and Economics 2005-1-1127, Berkeley Electronic Press. [Downloadable!]
  5. Katinka Pantzy & Anthony Ziegelmeyer, 2006. "Cooperative Networks: Theory and Experimental Evidence," Papers on Strategic Interaction 2005-32, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
  6. Ju, Yuan & Borm, Peter, 2006. "A non-cooperative approach to the compensation rules for primeval games," Discussion Paper 97, Tilburg University, Center for Economic Research. [Downloadable!]
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  7. Roberts Waddle, 2005. "Strategic Profit Sharing Between Firms: A Primer," Economics Working Papers we050801, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  8. Juan-Pablo Montero, 2006. "A simple auction mechanism for the optimal allocation of the commons," Working Papers 0608, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
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  9. Jacques H. DREZE & Charles FIGUIERES & Jean, HINDRIKS, 2006. "Vountary matching grants can forestall social dumping," Discussion Papers (ECON - Département des Sciences Economiques) 2006063, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
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  10. Roland Kirstein & Robert Cooter, . "Anti-Sharing," German Working Papers in Law and Economics 2005-1-1131, Berkeley Electronic Press. [Downloadable!]
  11. Yan Chen & Robert Gazzale, 2004. "When Does Learning in Games Generate Convergence to Nash Equilibria? The Role of Supermodularity in an Experimental Setting," American Economic Review, American Economic Association, vol. 94(5), pages 1505-1535, December. [Downloadable!]
  12. Casella, Alessandra, 2001. "Market Mechanisms for Policy Decisions," CEPR Discussion Papers 2667, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Ju, Yuan & Borm, Peter, 2005. "Externalities and compensation: primeval games and solutions," Discussion Paper 71, Tilburg University, Center for Economic Research. [Downloadable!]
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  14. Akira Yamada & Naoki Yoshihara, 2006. "Triple Implementation by Sharing Mechanisms in Production Economies with Unequal Labor Skill," Discussion Paper Series a475, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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  15. Joanne Roberts, 1999. "Implementing the Efficient Allocation of Pollution," Working Papers jorob-99-01, University of Toronto, Department of Economics. [Downloadable!]
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  16. Juergen Bracht & Charles Figuieres & Marisa Ratto, 2004. "Relative performance of two simple incentive mechanisms in a public good experiment," The Centre for Market and Public Organisation 04/102, Department of Economics, University of Bristol, UK. [Downloadable!]
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  17. Casella, Alessandra, 2000. "Games for Central Bankers: Markets vs. Politics in Public Policy Decisions," CEPR Discussion Papers 2496, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  18. Robin Boadway & Zhen Song & Jean-Francois Tremblay, 2006. "Commitment and Matching Contributions to Public Goods," Working Papers 1067, Queen's University, Department of Economics. [Downloadable!]
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  19. Mehmet Bac & Parimal Kanti Bag, 2000. "Strategic Information Revelation in Fund-Raising Campaigns," Econometric Society World Congress 2000 Contributed Papers 0178, Econometric Society. [Downloadable!]
  20. Joerg Breitscheidel & Hans Gersbach, 2005. "Self-Financing Environmental Mechanisms," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  21. Cheng-Zhong Qin, 2005. "Penalties and Rewards As Inducements To Cooperate," University of California at Santa Barbara, Economics Working Paper Series 13-02R, Department of Economics, UC Santa Barbara. [Downloadable!]
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