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Externality as a coordination problem

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  • Marek Hudik

    (Prague University of Economics and Business)

Abstract

Although externality is one of the basic concepts in economics, its rigorous definition remains elusive. This paper reconceptualizes externality as an instance of a broader phenomenon of incompatibility of plans—a situation where plans of different individuals cannot be materialized simultaneously because they compete for resources that are scarce. The plan incompatibility can be addressed by institutional arrangements involving mechanisms that determine which plans will be realized. Various institutional arrangements can be compared from the perspective of efficiency, operational costs, distributional effects, and other criteria. Regardless of the institutional arrangement, the spillover effects are unavoidable, as they are implied by scarcity. Therefore, the analysis of externalities should shift its focus from spillover effects to the mechanisms for allocating scarce resources among competing plans.

Suggested Citation

  • Marek Hudik, 2024. "Externality as a coordination problem," Public Choice, Springer, vol. 201(3), pages 495-510, December.
    • Handle: RePEc:kap:pubcho:v:201:y:2024:i:3:d:10.1007_s11127-023-01122-4
    DOI: 10.1007/s11127-023-01122-4
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    More about this item

    Keywords

    Externality; Incompatibility of plans; Scarcity; Comparative institutional analysis; Conflict; Coordination;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • H00 - Public Economics - - General - - - General
    • P00 - Political Economy and Comparative Economic Systems - - General - - - General
    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General

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