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Economic theory has generally akcnowledged the role that institutions have in shaping economic space. The distinction however between physical and institutional descriptions of economic activity has not received adequate attention within the mainstream paradigm. In this paper I show how a proper distinction between the physical and institutional space in economic models will help clarify the concept of externality and provide a better interpretation of the relationship between externality and nonconvexity. I argue that within the Arrow-Debreu framework externality should be viewed as incongruence between the physical and institutional descriptions of the economic space. Accordingly the only consistent characterisation of externality is to view it as synonymous with missing markets or missing property rights. All that distinguishes a conventional commodity from an externality is the extent to which a market exists for the "good" in question. The common expression "markets for externalities" is misleading since it tends to imply that there is more to externality than simply the non-existence of a market. It is most likely the result of confounding certain kinds of jointness in production with externality. I also argue that contrary to conventional wisdom, detrimental externality has no special association with nonconvexity. Starrett's (1972) fundamental nonconvexity has to do with the specific institutional structure of Arrow markets rather than the detrimental nature of externality. Indeed, Arrow markets will not in general eliminate externalities. In a similar vein it is not detrimental externality, however intense, that causes the production possibility set to become nonconvex as argued by Baumol and Bradford (1972), but the particular interpretation of intensity that would make even conventional production possibility sets nonconvex. These points become apparent when one distinguishes between the convexity of the physical and institutional production sets. An understanding that "externality" is purely an institutional construct will assist in a proper appraisal of the critical economic function of institutions.
Debate over the important concept of externality has influenced our perception of the role of governing authorities and has become central to our appraisal of the ecology-economy connection. Despite this, it remains hazy as a concept. This book examines ideas of externality and some of the ways that these have influenced and should continue to influence economics. The difficult issue of defining or characterising externalities is tackled and the effect that externality theory has had on major economic issues is investigated. The author provides a distinctive and non-technical survey of the various methodological approaches taken by economists to the issue of externalities. He fully explains and analyses the ideas lying behind the theory and looks at the failure of some markets to reconcile individual and social costs and benefits. The book's major theme is an exploration of institutional inefficiency and the implications of incorporating organizational costs into economic models.
Providing an economic account of why trusts exist and how trust law should be shaped, this book explains the economic benefits of trusts as an extension of the law of property, arguing against accounts of trusts law grounded in the law of personal obligations. The theoretical model is then used to criticise recent developments in the law.
Shows how thinking in evolutionary terms enhances our understanding of the economic and social change taking place at all levels.
I develop a model of firm-to-firm search and matching to show that the impact of falling trade costs on firm sourcing decisions and consumer welfare depends on the relative size of search externalities in domestic and international markets. These externalities can be positive if firms share information about potential matches, or negative if the market is congested. Using unique firm-to-firm transaction-level data from Uganda, I document empirical evidence consistent with positive externalities in international markets and negative externalities in domestic markets. I then build a dynamic quantitative version of the model and show that, in Uganda, a 25% reduction in trade costs led to a 3.7% increase in consumer welfare, 12% of which was due to search externalities.
This three-volume handbook includes state-of-the-art surveys in different areas of neoclassical production economics. Volumes 1 and 2 cover theoretical and methodological issues only. Volume 3 includes surveys of empirical applications in different areas like manufacturing, agriculture, banking, energy and environment, and so forth.
This book presents an updated and expanded discussion of theoretical treatment of externalities (i.e. uncompensated interdependencies), public goods, and club goods.
Despite the many benefits of energy, most of which are reflected in energy market prices, the production, distribution, and use of energy causes negative effects. Many of these negative effects are not reflected in energy market prices. When market failures like this occur, there may be a case for government interventions in the form of regulations, taxes, fees, tradable permits, or other instruments that will motivate recognition of these external or hidden costs. The Hidden Costs of Energy defines and evaluates key external costs and benefits that are associated with the production, distribution, and use of energy, but are not reflected in market prices. The damage estimates presented are substantial and reflect damages from air pollution associated with electricity generation, motor vehicle transportation, and heat generation. The book also considers other effects not quantified in dollar amounts, such as damages from climate change, effects of some air pollutants such as mercury, and risks to national security. While not a comprehensive guide to policy, this analysis indicates that major initiatives to further reduce other emissions, improve energy efficiency, or shift to a cleaner electricity generating mix could substantially reduce the damages of external effects. A first step in minimizing the adverse consequences of new energy technologies is to better understand these external effects and damages. The Hidden Costs of Energy will therefore be a vital informational tool for government policy makers, scientists, and economists in even the earliest stages of research and development on energy technologies.
Economists often assume that ecosystem and population dynamics are subject to convex, even linear processes. But research by ecosystem and population ecologists suggests that such processes are very often non-convex, for example a possible flip of the Gulf Stream due to fresh water intrusion from melting glaciers. This has dramatic implications for environmental and resource economics, since mistakes in management could prove more costly than imagined.