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A Solution to the Problem of Externalities When Agents are Well-Informed
Working paper
Hal Varian
December 1994 |
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| This paper decribes a class of simple two-stage games whose subgame-perfect equilibria implement efficient allocations in this sort of environment. In addition to implementing efficient outcomes, the mechanisms also achieve desirable distributional goals. In the case of public goods, the mechanisms implement Lindahl allocations; in the case of a negative externality, the injured parties are compensated. Because payment of “compensation” is an important feature of the mechanisms I describe, the general class of mechanisms is referred as compensation mechanisms. These mechanisms appear to work in a broad variety of economic environments and do not involve substantial restrictions on tastes or technology. They are also quite simple to describe and analyze. |
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| Last updated on: 12/19/2006 |
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