Elsevier

Journal of Economic Theory

Volume 72, Issue 2, February 1997, Pages 388-407
Journal of Economic Theory

Regular Article
Fundamental Nonconvexities in Arrovian Markets and a Coasian Solution to the Problem of Externalities

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Abstract

D. Starrett [J. Econ. Theory4(1972), 180–199] argues that the presence of externalities implies fundamental nonconvexities which cause Arrow markets to fail. While this is true, we argue this failure is due to the structure of the Arrovian markets that Starrett uses, and not to the presence of externalities as such. We provide an extension of a general equilibrium public goods model in which property rights are explicitly treated. Nonconvexities are not fundamental in this framework. We define a notion of Coasian equilibrium for this economy, and show first and second welfare theorems. In this context, the first welfare theorem is a type of Coase theorem.Journal of Economic LiteratureClassification Numbers: D62, H41.

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We are grateful to Marcus Berliant, Leo Hurwicz, and an anonymous referee for helpful comments.

R. H. HavemanJ. Margolis, Eds.