Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-28T08:40:23.522Z Has data issue: false hasContentIssue false
  • English
  • Français

MARKET INTERNALIZATION OF EXTERNALITIES: WHAT IS FAILING?

Published online by Cambridge University Press:  17 July 2014

Nathalie Berta  and
Elodie Bertrand
Nathalie Berta*
Affiliation:
Nathalie Berta: REGARDS, University of Reims Champagne Ardenne, France; [email protected].
Elodie Bertrand*
Affiliation:
Elodie Bertrand: PHARE (University Paris 1 Panthéon-Sorbonne and CNRS); [email protected].
Get access Rights & Permissions [Opens in a new window]

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
Information
Journal of the History of Economic Thought , Volume 36 , Issue 3 , September 2014 , pp. 331 - 357
Copyright
Copyright © The History of Economics Society 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Allen, Douglas W. 2000. “Transaction Costs.” In Bouckaert, Boudewijn and Geest, Gerrit De, eds., The Encyclopedia of Law and Economics, vol. I: The History and Methodology of Law and Economics. Cheltenham: Edward Elgar Publishing, pp. 893–926.Google Scholar
Arrow, Kenneth J. 1951. “An Extension of the Basic Theorems of Classical Welfare Economics.” In Neyman, Jerzy, ed., Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability. Berkeley: University of California Press, pp. 507–532.Google Scholar
Arrow, Kenneth J. 1959. “Towards a Theory of Price Adjustment.” In Abramovitz, Moses, ed., The Allocation of Economic Resources. Stanford: Stanford University Press, pp. 41–51.Google Scholar
Arrow, Kenneth J. 1962. “Economic Welfare and the Allocation of Resources for Invention.” In Nelson, Richard R., ed., The Rate and Direction of Inventive Activity: Economic and Social Factors. Princeton: Princeton University Press, pp. 609–626.Google Scholar
Arrow, Kenneth J. 1963. “Uncertainty and the Welfare Economics of Medical Care.” American Economic Review 53 (5): 941–973.Google Scholar
Arrow, Kenneth J. 1965. “Uncertainty and the Welfare Economics of Medical Care: Reply (The Implications of Transaction Costs and Adjustment Lags).” American Economic Review 55 (1–2): 154–158.Google Scholar
Arrow, Kenneth J. 1969. “The Organization of Economic Activity: Issues Pertinent to the Choice of Market Versus Non Market Allocation.” In Joint Economic Committee, ed., The Analysis and Evaluation of Public Expenditures: The PPB System, vol. 1. Washington, DC: Government Printing Office, pp. 47–64. Repr. in Collected Papers of Kenneth J. Arrow, vol. 2: General Equilibrium. Oxford: Basil Blackwell, 1983, pp. 133–155.Google Scholar
Arrow, Kenneth J. 1979. “The Property Rights Doctrine and Demand Revelation under Incomplete Information.” In Boskin, Michael J., ed., Economics and Human Welfare: Essays in Honour of Tibor Scitovski. New York: Academic Press, pp. 23–39.CrossRefGoogle Scholar
Arrow, Kenneth J. 1984. Collected Papers, vol. 4: The Economics of Information. Oxford: Basil Blackwell.Google Scholar
Arrow, Kenneth J. 1985. Collected Papers, vol. 6: Applied Economics. Oxford: Basil Blackwell.Google Scholar
Arrow, Kenneth J. 1987. “Oral History I: An Interview.” In Feiwel, George R., ed., Arrow and the Ascent of Modern Economic Process. Basingstoke: Macmillan, pp. 191–242.Google Scholar
Arrow, Kenneth J., and Debreu, Gérard. 1954. “Existence of an Equilibrium for a Competitive Economy.” Econometrica 22 (3): 265–290.CrossRefGoogle Scholar
Arrow, Kenneth J., and Hahn, Frank H.. 1971. General Competitive Analysis. San Francisco: Holden-Day.Google Scholar
Bator, Francis M. 1958. “The Anatomy of Market Failure.” Quarterly Journal of Economics 72 (3): 351–379.Google Scholar
Baumol, William J., and Oates, Wallace E.. 1988. The Theory of Environmental Policy. Second edition. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Berta, Nathalie. 2000. “Origines et Fondements de la Représentation du Marché dans la Théorie de l’Equilibre Général Concurrentiel.” PhD thesis, University of Paris 1.Google Scholar
Berta, Nathalie. 2014. “On the definition of externality as a missing market.” Mimeo.Google Scholar
Berta, Nathalie., Julien, Ludovic, and Tricou, Fabrice, eds. 2012. On Perfect Competition From Past to Present: Definitions, Usages and Foundations. Special issue of Papers on Political Economy / Cahiers d’Economie Politique 63.Google Scholar
Bertrand, Elodie. 2006a. “La Thèse d’Efficience du ‘Théorème de Coase’: Quelle Critique de la Microéconomie?” Revue Economique 57 (5): 983–1007.Google Scholar
Bertrand, Elodie. 2006b. “The Coasean Analysis of Lighthouse Financing: Myths and Realities.” Cambridge Journal of Economics 30 (3): 389–402.CrossRefGoogle Scholar
Bertrand, Elodie. 2010. “The Three Roles of the ‘Coase Theorem’ in Coase’s Works.” The European Journal of History of Economic Thought 17 (4): 975–1000.CrossRefGoogle Scholar
Bertrand, Elodie. 2013. “Coase’s Choice of Methodology.” Mimeo.Google Scholar
Bertrand, Elodie. 2014. “From the Firm to Economic Policy: The Problem of Coase’s Cost.” Mimeo.Google Scholar
Bliss, Christopher. 1987. “Arrow’s Vision of the Economic Process.” In Feiwel, George R., ed., Arrow and the Ascent of Modern Economic Process. Basingstoke: Macmillan, pp. 295–305.Google Scholar
Boyd, John H. III, and Conley, John P.. 1997. “Fundamental Nonconvexities in Arrovian Markets and a Coasian Solution to the Problem of Externalities.” Journal of Economic Theory 72 (2): 388–407.Google Scholar
Buchanan, James M. 1984. “Rights, Efficiency, and Exchange: The Irrelevance of Transactions Cost.” In Neumann, Manfred, ed., Ansprüche, Eigentums, und Verfügungsrechte. Berlin: Duncker and Humblot, pp. 9–24. Repr. in James M. Buchanan, ed., Liberty, Market and the State: Political Economy in the 1980s. New York: New York University Press, 1986, pp. 92–107.Google Scholar
Buchanan, James M., and Craig Stubblebine, W.. 1962. “Externality.” Economica 29 (116): 371–384.CrossRefGoogle Scholar
Buchanan, James M., and Tullock, Gordon. 1962. The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor: Michigan University Press.Google Scholar
Calabresi, Guido. 1968. “Transaction Costs, Resource Allocation and Liability Rules—A Comment.” Journal of Law and Economics 11 (1): 67–73.CrossRefGoogle Scholar
Calabresi, Guido. 1991. “The Pointlessness of Pareto: Carrying Coase Further.” Yale Law Journal 100 (5): 1211–1237.Google Scholar
Coase, Ronald H. 1937. “The Nature of the Firm.” Economica 4 (16): 386–405.Google Scholar
Coase, Ronald H. 1959. “The Federal Communications Commission.” Journal of Law and Economics 2: 1–40.Google Scholar
Coase, Ronald H. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3: 1–44.CrossRefGoogle Scholar
Coase, Ronald H. 1964. “Discussion of ‘Direct Regulation and Market Performance in the American Economy’, by Richard E. Caves, and ‘The Effectiveness of Economic Regulation: A Legal View’, by Roger C. Crampton.” American Economic Review 54 (3): 194–197.Google Scholar
Coase, Ronald H. 1974. “The Lighthouse in Economics.” Journal of Law and Economics 17 (2): 357–376.Google Scholar
Coase, Ronald H. 1981. “The Coase Theorem and the Empty Core: A Comment.” Journal of Law and Economics 24 (1): 183–187.CrossRefGoogle Scholar
Coase, Ronald H. 1982. “How Should Economists Choose?” G. Warren Nutter Lecture in Political Economy, Washington, DC: The American Enterprise Institute for Public Policy Research. Repr. in Ronald H. Coase, Essays on Economics and Economists. Chicago: The University of Chicago Press, 1994, pp. 15–33.Google Scholar
Coase, Ronald H. 1988a. “Blackmail.” Virginia Law Review 74 (4): 655–676.Google Scholar
Coase, Ronald H. 1988b. The Firm, the Market and the Law. Chicago: The University of Chicago Press.Google Scholar
Coase, Ronald H. 1992. “The Institutional Structure of Production: 1991 Alfred Nobel Memorial Prize Lecture in Economic Sciences.” American Economic Review 82 (4): 713–719.Google Scholar
Coase, Ronald H., and Wang, Ning. 2012. How China Became Capitalist. New York: Palgrave Macmillan.Google Scholar
Coleman, Jules L. 1984. “Economics and the Law: A Critical Review of the Foundations of the Economic Approach to Law.” Ethics 94 (4): 649–679.Google Scholar
Commons, Jules R. [1924] 1974. Legal Foundations of Capitalism. Clifton: A. M. Kelley.Google Scholar
Cooter, Robert D. 1980. “How the Law Circumvents Starrett’s Nonconvexity.” Journal of Economic Theory 22 (3): 499–504.Google Scholar
Cooter, Robert D. 1982. “The Cost of Coase.” Journal of Legal Studies 11 (1): 1–33.CrossRefGoogle Scholar
Cornes, Richard, and Sandler, Todd. 1996. The Theory of Externalities, Public Goods and Club Goods. Second edition. New York: Cambridge University Press.Google Scholar
Dales, John H. 1968. Pollution, Property and Prices: An Essay in Policy-Making and Economics. Toronto: University of Toronto Press.Google Scholar
Dahlman, Carl J. 1979. “The Problem of Externality.” Journal of Law and Economics 22 (1): 141–162.CrossRefGoogle Scholar
Debreu, Gérard. 1951. “The Coefficient of Resource Utilization.” Econometrica 19 (3): 273–292.Google Scholar
Debreu, Gérard, and Scarf, Herbert. 1963. “A Limit Theorem on the Core of an Economy.” International Economic Review 4 (3): 235–246.Google Scholar
Demsetz, Harold. 1964. “The Exchange and Enforcement of Property Rights.” Journal of Law and Economics 7: 11–26.Google Scholar
Demsetz, Harold. 1966. “Some Aspects of Property Rights.” Journal of Law and Economics 9: 61–70.Google Scholar
Demsetz, Harold. 1967. “Toward a Theory of Property Rights.” American Economic Review 57 (2): 347–359.Google Scholar
Demsetz, Harold. 1969. “Information and Efficiency: Another Viewpoint.” Journal of Law and Economics 12 (1): 1–22.CrossRefGoogle Scholar
Duffie, Darrell, and Sonnenschein, Hugo. 1989. “Arrow and General Equilibrium Theory.” Journal of Economic Literature 27 (2): 565–598.Google Scholar
Edgeworth, Francis Y. 1881. Mathematical Psychics. An Essay on the Application of Mathematics to the Moral Sciences. London: Kegan Paul.Google Scholar
Farrell, Joseph. 1987. “Information and the Coase Theorem.” Journal of Economic Perspectives 1 (2): 113–129.Google Scholar
Fox, Glenn. 2007. “The Real Coase Theorems.” Cato Journal 27 (3): 373–396.Google Scholar
Friedman, Milton. 1953. “The Methodology of Positive Economics.” In Essays in Positive Economics. Chicago: University of Chicago Press, pp. 3–43.Google Scholar
Gale, David. 1955. “The Law of Supply and Demand.” Mathematica Scandinavia 3: 155–169.Google Scholar
Heller, Walter P., and Starrett, David A.. 1976. “On the Nature of Externalities.” In Lin, Steven A. Y., ed., Theory and Measurement of Economic Externalities. New York: Academic Press, pp. 9–21.Google Scholar
Hildenbrand, Werner, and Kirman, Alan P.. [1988] 1991. Equilibrium Analysis: Variations on Themes by Edgeworth and Walras. Second edition. Amsterdam: North-Holland.Google Scholar
Hoffman, Elizabeth, and Spitzer, Matthew L.. 1982. “The Coase Theorem: Some Experimental Tests.” Journal of Law and Economics 25 (1): 73–98.Google Scholar
Hurwicz, Leonid. 1995. “What Is the Coase Theorem?” Japan and the World Economy 7 (1): 49–74.Google Scholar
Klaes, Matthias. 2000. “The History of the Concept of Transaction Costs: Neglected Aspects.” Journal of the History of Economic Thought 22 (2): 191–216.Google Scholar
Kornai, Janos. 1979. “The Oeuvre of Kenneth J. Arrow.” Acta OEconomica 23 (1–2): 193–203.Google Scholar
Laffont, Jean-Jacques. 1976. “Decentralization with Externalities.” European Economic Review 7 (4): 359–375.CrossRefGoogle Scholar
Laffont, Jean-Jacques. 1977. Effets Externes et Théorie Economique. Paris : Editions du CNRS, collection Monographies du séminaire d’économétrie.Google Scholar
Laffont, Jean-Jacques. 1988. Fundamentals of Public Economics. Translation by Bonin, John P. and Bonin, Hélène of Cours de théorie microéconomique, vol. 1: Fondements de l’Economie Publique (Paris: Economica, 1982). Cambridge: MIT Press.Google Scholar
Lagueux, Maurice. 2010. “The Residual Character of Externalities.” The European Journal of the History of Economic Thought 17 (4): 957–973.Google Scholar
Mäki, Uskali. 1998. “Is Coase a Realist?” Philosophy of the Social Sciences 28 (1): 5–31.Google Scholar
McKelvey, Richard D., and Page, Talbot. 1999. “Taking the Coase Theorem Seriously.” Economics and Philosophy 15 (2): 235–247.Google Scholar
McKenzie, Lionel W. 1954. “On Equilibrium in Graham’s Model of World Trade and Other Competitive Systems.” Econometrica 22 (2): 147–161.CrossRefGoogle Scholar
McKenzie, Lionel W. 1955. “Competitive Equilibrium with Dependant Consumer Preferences.” In Antosiewicz, Henry A., ed., Proceedings of the Second Symposium in Linear Programming. Washington, DC: National Bureau of Standards and Directorate of Management Analysis, pp. 277–294.Google Scholar
Meade, James E. 1952. “External Economies and Diseconomies in a Competitive Situation.” Economic Journal 62 (245): 54–67.Google Scholar
Medema, Steven G. 1994. Ronald H. Coase. London: Macmillan.Google Scholar
Medema, Steven G. 1996a. “Coase, Costs, and Coordination.” Journal of Economic Issues 30 (2): 571–578.Google Scholar
Medema, Steven G. 1996b. “Of Pangloss, Pigouvians and Pragmatism: Ronald Coase and Social Cost Analysis.” Journal of the History of Economic Thought 18 (1): 96–114.Google Scholar
Medema, Steven G. 1996c. “Ronald Coase and American Institutionalism.” Research in the History of Economic Thought and Methodology 14: 51–92.Google Scholar
Medema, Steven G. 1999. “Legal Fiction: The Place of the Coase Theorem in Law and Economics.” Economics and Philosophy 15 (2): 209–233.CrossRefGoogle Scholar
Medema, Steven G. 2009. The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas. Princeton: Princeton University Press.Google Scholar
Medema, Steven G. 2011. “A Case of Mistaken Identity: George Stigler, ‘The Problem of Social Cost’, and the Coase Theorem.” European Journal of Law and Economics 31 (1): 11–38.Google Scholar
Medema, Steven G. 2014. “Neither Misunderstood Nor Ignored: The Early Reception of Coase’s Wider Challenge to the Analysis of Externalities.” History of Economic Ideas (forthcoming).Google Scholar
Medema, Steven G., and Zerbe, Richard O. Jr. 2000. “The Coase Theorem.” In Bouckaert, Boudewijn and Geest, Gerrit De, eds, The Encyclopedia of Law and Economics, vol. I: The History and Methodology of Law and Economics. Cheltenham: Edward Elgar, pp. 836–892.Google Scholar
Mishan, Ezra J. 1965. “Reflections on Recent Developments in the Concept of External Effects.” Canadian Journal of Economics and Political Science 31 (1): 3–34.Google Scholar
Mishan, Ezra J. 1971a. “Pangloss on Pollution.” Swedish Journal of Economics 73 (1): 113–120.Google Scholar
Mishan, Ezra J. 1971b. “The Postwar Literature on Externalities: An Interpretative Essay.” Journal of Economic Literature 9 (1): 1–28.Google Scholar
Papandreou, Andreas A. 1994. Externality and Institutions. New York: Oxford University Press.Google Scholar
Pigou, Arthur Cecil. [1932] 1948. The Economics of Welfare. Fourth edition. London: Macmillan.Google Scholar
Polinsky, A. Mitchell. 1979. “Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax-subsidy Approaches.” Journal of Legal Studies 8 (1): 1–48.Google Scholar
Pratten, Stephen. 2004. “The Conflict between Formalism and Realisticness in Modern Economics: The Case of the New Institutional Economics.” In Davis, John B., Marciano, Alain, and Runde, Jochen, eds., The Elgar Companion to Economics and Philosophy. Cheltenham: Edward Elgar, pp. 339–363.Google Scholar
Regan, Donald H. 1972. “The Problem of Social Cost Revisited.” Journal of Law and Economics 15 (2): 427–437.Google Scholar
Rob, Rafael. 1989. “Pollution Claim Settlements under Private Information.” Journal of Economic Theory 47 (2): 307–333.Google Scholar
Samuelson, Paul A. 1967. “The Monopolistic Competition Revolution.” In Kuenne, Robert E., ed., Monopolistic Competition Theory: Studies in Impact; Essays in Honour of Edward H. Chamberlin. New York: Wiley. Repr. in Robert C. Merton, ed., The Collected Scientific Papers of Paul A. Samuelson, vol. 3. Cambridge: MIT Press, 1972, pp. 18–51.Google Scholar
Samuelson, William. 1985. “A Comment on the Coase Theorem.” In Roth, Alvin E., ed., Game-Theoretic Models of Bargaining. Cambridge: Cambridge University Press, pp. 599–611.Google Scholar
Schweizer, Urs. 1988. “Externalities and the Coase Theorem: Hypothesis or Result?” Journal of Institutional and Theoretical Economics 144 (2): 245–266.Google Scholar
Scitovsky, Tibor. 1954. “Two Concepts of External Economies.” Journal of Political Economy 62 (2): 143–151.CrossRefGoogle Scholar
Starrett, David A. 1972. “Fundamental Nonconvexities in the Theory of Externalities.” Journal of Economic Theory 4 (2): 180–199.Google Scholar
Stigler, George J. 1966. The Theory of Price. Third edition. New York: Macmillan.Google Scholar
Stigler, George J. 1992. “Law or Economics?” Journal of Law and Economics 35 (2): 455–468.Google Scholar
Varian, Hal R. 1995. “Coase, Competition, and Compensation.” Japan and the World Economy 7 (1): 13–27.Google Scholar
Veljanovski, Cento G. 1982. “The Coase Theorems and the Economic Theory of Markets and Law.” Kyklos 35 (1): 53–74.Google Scholar
Viner, Jacob. 1931. “Cost Curves and Supply Curves.” Zeitschrift für Nationalökonomie 3: 23–46.Google Scholar
Walras, Léon. 1874. Elements d’Economie Politique Pure ou Théorie de la Richesse Sociale. Lausanne: Corbaz. Elements of pure Economics, or the Theory of Social Wealth, translated by William Jaffé. London: Routledge, 2010.Google Scholar
Wang, Ning. 2003. “Coase on the Nature of Economics.” Cambridge Journal of Economics 27 (6): 807–829.Google Scholar
Wellisz, Stanislaw. 1964. “On External Diseconomies and the Government-assisted Invisible Hand.” Economica 31 (124): 345–362.Google Scholar
Zerbe, Richard O. Jr. 1980. “The Problem of Social Cost in Retrospect.” Research in Law and Economics 2: 83–102.Google Scholar
Zerbe, Richard O. Jr., and McCurdy, Howard E.. 1999. “The Failure of Market Failure.” Journal of Policy Analysis and Management 18 (4): 558–578.Google Scholar