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i.A. des Bundesministeriums für Bildung, Wissenschaft und Kultur / Forschungsschwerpunkt 'Kulturlandschaft' unter Leitung der Abteilung für Hydrobiologie, Fischereiwirtschaft und

This paper is concerned with those actions of business firms which have harmful effects on others. The standard example is that of a factory the smoke from which has harmful effects on those occupying neighbouring properties. The economic analysis of such a situation has usually proceeded in terms of a divergence between the private and social product of the factory, in which economists have largely followed the treatment of Pigou in The Economics of Welfare. The conclusions to which this kind of analysis seems to have led most economists is that it would be desirable to make the owner of the factory liable for the damage caused to those injured by the smoke, or alternatively, to place a tax on the factory owner varying with the amount of smoke produced and equivalent in money terms to the damage it would cause, or finally, to exclude the factory from residential districts (and presumably from other areas in which the emission of smoke would have harmful effects on others). It is my contention that the suggested courses of action are inappropriate, in that they lead to results which are not necessarily, or even usually, desirable.

/pdf/the-problem-of-social-cost-1id4ldyydu.pdf

The Problem of Social Cost

This book presents a theoretical treatment of externalities (i.e. uncompensated interdependencies), public goods, and club goods. The new edition updates and expands the discussion of externalities and their implications, coverage of asymmetric information, underlying game-theoretic formulations, and intuitive and graphical presentations. Aimed at well-prepared undergraduates and graduate students making a serious foray into this branch of economics, the analysis should also interest professional economists wishing to survey recent advances in the field. No other single source for the range of materials explored is currently available. Topics investigated include Nash equilibrium, Lindahl equilibria, club theory, preference-revelation mechanism, Pigouvian taxes, the commons, Coase Theorem, and static and repeated games. The authors use mathematical techniques only as much as necessary to pursue the economic argument. They develop key principles of public economics that are useful for subfields such as public choice, labor economics, economic growth, international economics, environmental and natural resource economics, and industrial organization.

The Theory of Externalities, Public Goods, and Club Goods

Environmental Economics: A Survey

PrefaceGame theory is the study of multiperson decision problems. Such problems arise frequently in economics. As is widely appreciated, for example, oligopolies present multiperson problems -- each firm must consider what the others will do. But many other applications of game theory arise in fields of economics other than industrial organization. At the micro level, models of trading processes (such as bargaining and auction models) involve game theory. At an intermediate level of aggregation, labor and financial economics include game-theoretic models of the behavior of a firm in its input markets (rather than its output market, as in an oligopoly). There also are multiperson problems within a firm: many workers may vie for one promotion; several divisions may compete for the corporation's investment capital. Finally, at a high level of aggregation, international economics includes models in which countries compete (or collude) in choosing tariffs and other trade policies, and macroeconomics includes models in which the monetary authority and wage or price setters interact strategically to determine the effects of monetary policy.This book is designed to introduce game theory to those who will later construct (or at least consume) game-theoretic models in applied fields within economics. The exposition emphasizes the economic applications of the theory at least as much as the pure theory itself, for three reasons. First, the applications help teach the theory; formal arguments about abstract games also appear but play a lesser role. Second, the applications illustrate the process of model building -- the process of translating an informal description of a multiperson decision situation into a formal, game-theoretic problem to be analyzed. Third, the variety of applications shows that similar issues arise in different areas of economics, and that the same game-theoretic tools can be applied in each setting. In order to emphasize the broad potential scope of the theory, conventional applications from industrial organization largely have been replaced by applications from labor, macro, and other applied fields in economics.We will discuss four classes of games: static games of complete information, dynamic games of complete information, static games of incomplete information, and dynamic games of incomplete information. (A game has incomplete information if one player does not know another player's payoff, such as in an auction when one bidder does not know how much another bidder is willing to pay for the good being sold.) Corresponding to these four classes of games will be four notions of equilibrium in games: Nash equilibrium, subgame-perfect Nash equilibrium, Bayesian Nash equilibrium, and perfect Bayesian equilibrium.Two (related) ways to organize one's thinking about these equilibrium concepts are as follows. First, one could construct sequences of equilibrium concepts of increasing strength, where stronger (i.e., more restrictive) concepts are attempts to eliminate implausible equilibria allowed by weaker notions of equilibrium. We will see, for example, that subgame-perfect Nash equilibrium is stronger than Nash equilibrium and that perfect Bayesian equilibrium in turn is stronger than subgame-perfect Nash equilibrium. Second, one could say that the equilibrium concept of interest is always perfect Bayesian equilibrium (or perhaps an even stronger equilibrium concept), but that it is equivalent to Nash equilibrium in static games of complete information, equivalent to subgame-perfection in dynamic games of complete (and perfect) information, and equivalent to Bayesian Nash equilibrium in static games of incomplete information.The book can be used in two ways. For first-year graduate students in economics, many of the applications will already be familiar, so the game theory can be covered in a half-semester course, leaving many of the applications to be studied outside of class. For undergraduates, a full-semester course can present the theory a bit more slowly, as well as cover virtually all the applications in class. The main mathematical prerequisite is single-variable calculus; the rudiments of probability and analysis are introduced as needed.I learned game theory from David Kreps, John Roberts, and Bob Wilson in graduate school, and from Adam Brandenburger, Drew Fudenberg, and Jean Tirole afterward. I owe the theoretical perspective in this book to them. The focus on applications and other aspects of the pedagogical style, however, are largely due to the students in the MIT Economics Department from 1985 to 1990, who inspired and rewarded the courses that led to this book. I am very grateful for the insights and encouragement all these friends have provided, as well as for the many helpful comments on the manuscript I received from Joe Farrell, Milt Harris, George Mailath, Matthew Rabin, Andy Weiss, and several anonymous reviewers. Finally, I am glad to acknowledge the advice and encouragement of Jack Repcheck of Princeton University Press and financial support from an Olin Fellowship in Economics at the National Bureau of Economic Research.

A Primer in Game Theory

Part 1 Introduction: basic concepts in macroeconomics output determination - introducing aggregate supply and aggregate demand. Part 2 Intertemporal economics: consumption and saving investment saving, investment and the current account the government sector. Part 3 Monetary economics: money demand the money supply process money, exchange rates and prices inflation - fiscal and monetary aspects. Part 4 Output determination, stabilization policy and growth: macroeconomic policies and output determination in the closed economy macroeconomic policies in the open economy - the case of fixed exchange rates, the case of flexible exchange rates inflation and unemployment institutional determinants of wages and unemployment explaining business cycles long-term growth. Part 5 Special topics in macroeconomics: the theory and practice of economic policy financial markets tradeable and non-tradeable goods the developing country debt crisis stopping high inflations.

i.A. des Bundesministeriums für Bildung, Wissenschaft und Kultur / Forschungsschwerpunkt 'Kulturlandschaft' unter Leitung der Abteilung für Hydrobiologie, Fischereiwirtschaft und

References

The Problem of Social Cost

The Theory of Externalities, Public Goods, and Club Goods

Environmental Economics: A Survey

A Primer in Game Theory

Macroeconomics in the Global Economy