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MARKET INTERNALIZATION OF EXTERNALITIES: WHAT IS FAILING?

Published online by Cambridge University Press:  17 July 2014

Nathalie Berta*
Affiliation:
Nathalie Berta: REGARDS, University of Reims Champagne Ardenne, France; nathalie.berta@univ-reims.fr.
Elodie Bertrand*
Affiliation:
Elodie Bertrand: PHARE (University Paris 1 Panthéon-Sorbonne and CNRS); Elodie.Bertrand@univ-paris1.fr.

Abstract

The usual internalization of externality ‘by the market’ can be thought of through two different exchange modes: competitive markets, with Kenneth J. Arrow (1969); or bargaining, with Ronald H. Coase (1960). Although, in both cases, ‘externality’ refers to a non-exchanged effect that produces suboptimalities, these authors are working with two different, implicit conceptions of externality, rooted in different analytical worlds and calling for different institutions—parametric prices for the former but not for the latter. Moreover, while both start out with different theoretical frameworks, the authors share a concern for realism and unite when they introduce transaction costs, both advocating a policy design that calls for taking into account the costs of the different solutions. Nevertheless, this introduction of transaction costs does not itself escape consistency problems, since they do both maintain a reference to their respective ideal worlds.

Type
Articles
Copyright
Copyright © The History of Economics Society 2014 

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References

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