Externalities and Compensation: Primeval Games and Solutions

CentER Discussion Paper No. 2005-71

27 Pages Posted: 11 Jul 2005

See all articles by Yuan Ju

Yuan Ju

University of York; Tilburg University

Peter Borm

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Econometrics & Operations Research

Date Written: April 2005

Abstract

The classical literature (Pigou (1920), Coase (1960), Arrow (1970)) and the relatively recent studies (cf.Varian (1994)) associate the externality problem with efficiency. This paper focuses explicitly on the compensation problem in the context of externalities. To capture the features of inter-individual externalities, this paper constructs a new game-theoretic framework: primeval games. These games are used to design normative compensation rules for the underlying compensation problems: the marginalistic rule, the concession rule, and the primeval rule. Characterizations of the marginalistic rule and the concession rule are provided and specific properties of the primeval rule are studied.

Keywords: Externality, compensation, primeval games, marginalistic rule, concession rule, primeval rule

JEL Classification: C71, D62, D63

Suggested Citation

Ju, Yuan and Borm, Peter E. M., Externalities and Compensation: Primeval Games and Solutions (April 2005). CentER Discussion Paper No. 2005-71, Available at SSRN: https://ssrn.com/abstract=756365 or http://dx.doi.org/10.2139/ssrn.756365

Yuan Ju (Contact Author)

University of York ( email )

Department of Economics and Related Studies
Heslington
York, YO10 5DD
United Kingdom

Tilburg University

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Peter E. M. Borm

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Department of Econometrics & Operations Research

Tilburg, 5000 LE
Netherlands