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

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  • Varian, H,R.

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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Suggested Citation

  • Varian, H,R., 1991. "A Solution to the Problem of Externalities when Agents are Well-Informed," Papers 10, Michigan - Center for Research on Economic & Social Theory.
    • Handle: RePEc:fth:michet:10
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    References listed on IDEAS

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    1. Andreoni,J. & Varian,H., 1999. "Pre-play contracting in the prisoners' dilemma," Working papers 18, Wisconsin Madison - Social Systems.
    2. Mark Bagnoli & Barton L. Lipman, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(4), pages 583-601.
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    More about this item

    Keywords

    game theory ; economic models;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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