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

In Search of an Alternative to Shareholder Value Maximization

“…The fundamentality of nonconvexities for real economies with externalities has been challenged, however, by Boyd and Conley (1997). They argue that nonconvexities are fundamental to the Arrow/Starrett framework because it does not seem to offer a method of placing reasonable bounds on the extent to which the victim firms can observe the externality (sell externality rights to the generators).…”

“…For the time being, let us explain why we firmly disagree with the latter argument. In a sense, Boyd and Conley (1997) rephrase detrimental externalities as the production of a public bad (i.e., a bad of collective consumption), and look at Lindahl equilibria of the corresponding economy. Postulating the scarcity of this public bad, they conclude that a Lindahl equilibrium where agents can trade the public bad are optimal (under otherwise standard conditions).…”

Externalities and fundamental nonconvexities: A reconciliation of approaches to general equilibrium externality modeling and implications for decentralization

“…4 In general, Hurwicz [1999] shows the impossibility of the existence of finite-dimensional decentralized mechanisms that guarantee Pareto optimality in the presence of externalities, for all economic environments (including nonconvex ones). 5 More recently, however, Boyd and Conley [1997], henceforth referred to as BC, and Conley and Smith [2002] have challenged the fundamentality of nonconvexities for real economies with externalities. They argue that nonconvexities are fundamental to the Arrow/Starrett framework because it does not seem to offer a method of placing reasonable bounds on the extent to which the victim firms can observe the externality (sell externality rights to the generators).…”

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AbstractBy distinguishing between producible and nonproducible public goods, we are able to propose a general equilibrium model with externalities that distinguishes between and encompasses both the Starrett [1972] and Boyd and Conley [1997] type external effects. We show that while nonconvexities remain fundamental whenever the Starrett type external effects are present, these are not caused by the type discussed in Boyd and Conley.

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A competitive equilibrium for a warm-glow economy

“…Conley (1994), Wooders(1997) and Florenzano and del Mercato (2006) show the existence of Lindahl equilibrium through subtle context specific core-equilibrium convergence. More recently, the work of Boyd and Conley (1997), Conley and Smith (2005) and Murty (2006) show the existence of competitive equilibrium in economies with externalities, in which the first welfare theorem could be interpreted as a Coase-like Theorem. It is worth noticing that, pure public goods could be accommodated in their model as a special case of additive externalities.…”