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Public Choice
Published in: Public Choice 1-2/2023

02-05-2023

Beyond Pigou: externalities and civil society in the supply–demand framework

Author: Casey B. Mulligan

Published in: Public Choice | Issue 1-2/2023

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Abstract

The extent of voluntary cooperation in the presence of externalities is shown as an equilibrium outcome in the supply and demand framework. The analysis uses familiar ingredients to provide a new way of understanding the results of the extensive literature beginning with Buchanan, Coase, Ostrom, Shapley, Telser, Tullock, and Williamson showing that a Pigouvian tax is not the only alternative to independently acting individuals who are coordinated merely through distorted market prices. Voluntary cooperation transforms the character of the costs resulting from externalities and may have a far different incidence than Pigouvian taxes and subsidies do. The paper discusses applications including forest management, volume discounts, residential associations, energy policy, the scope of planning of household activities, and the role of workplaces in preventing infectious disease.
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Footnotes
1
For example, equilibrium analysis of infectious disease beginning with Philipson and Posner (1993) through the COVID-19 pandemic (Brodeur, et al., 2021) contrast uncoordinated individual action with public policy solutions. Leeson & Rouanet (2021) is an exception.
 
2
Civil society is sometimes defined as non-profit non-governmental organizations. I define it more broadly to be all organizations or associations of multiple individuals, each of whom is free to exit the group and forgo whatever benefits the group offers its members and avoid its membership costs.
 
3
I neglect income effects on the demand for q. Defined over q and all other goods x, consumer preferences are \(x+{\int }_{0}^{q}{D}^{-1}\left(z\right)dz\).
 
4
Excise, income, and consumption taxes used for revenue purposes are not explicitly treated here. One approach would be to put in the baseline all taxes that are for revenue purposes. The baseline equilibrium would thereby have fiscal externalities in that movement of consumer expenditure and factor costs out of the industry (a reduction in q) would affect aggregate tax revenue. Under this interpretation, our denotes the combination of fiscal externalities and the type of externalities emphasized in this chapter. The optimal Pigouvian excise tax would adjust the marginal fiscal externalities so that they exactly offset the other externalities, which in our notation is t +  = 0.
 
5
See also Sallee (2019). Buchanan & Tullock (1975) emphasize the different incidence of regulatory versus tax responses to externalities.
 
6
Ostrom (1990, p. 15) notes that the disadvantages of state solutions to (common pool) externalities include “dependen[cy] on the accuracy of information obtained by a distant government official….” She adds that “it is difficult for a central authority to have sufficient time-and-place information to estimate accurately … the appropriate fines to induce cooperative behavior.”.
 
7
Because a consumer with income y, consuming q, and paying average price p consumes y-pq of all other goods, the price-quantity combinations that yield utility U satisfy \(p=\frac{y-U+{\int }_{0}^{q}{D}^{-1}\left(z\right)dz}{q}\).
 
8
The vertical line at qe is analogous to the contract curve in an Edgeworth box, which would have q and all other goods as the two axes rather than q and p. The indifference curves and iso-other curves correspond with indifference curves in the Edgeworth box.
 
9
The core is typically defined in endowment economies as a feasible allocation for the entire economy that cannot be improved upon by any subset of agents (including a single person) that delivers greater utility to each of its members by removing each member’s endowment from the aggregate and reallocating them among themselves. In this way, the core emphasizes competition among groups in which members can choose their group and groups choose their members.
 
10
Buchanan & Stubblebine (1962) is an early paper that accounts for Coase bargains under an excise-tax regime.
 
11
Ostrom (1990) also emphasizes cooperative institutions “resembling neither the state nor the market” and their maintenance costs, which she formally models as a parameter in a noncooperative game.
 
12
The nudge hypothesis, which is an implication of the standard consumer theory, is that consumers are easily moved a small distance off their demand curve in the quantity dimension (Chapter 5 of Jaffe et al., 2019).
 
13
Expressed as a function of quantity, the right-hand-side of (3) is 1 − δ + c′(D−1(q)−1)/D(D−1(q)).
 
14
The results in this paragraph require D(1) > 0.
 
15
Exactly three-fourths is eliminated if demand is linear in the interval (1 − δ, 1). More (less) than three-fourths is eliminated if demand is convex (concave) in that range, respectively.
 
16
Wildlife stocks in the United States are commonly managed by, among other things, limiting the duration of the hunting season.
 
17
Notice how the Fig. 3 has four distinct values that might be called prices: the list price (one), the average price (expenditure per unit quantity, sometimes known as “net price”), the marginal price (equal to social marginal cost inclusive of cooperation costs), and the part of social marginal cost without cooperation (1 − δ).
 
18
Manufacturer rebates also occur in other industries.
 
19
Indeed, the insurance plans themselves cooperate via clubs, known as group purchasing organizations and pharmacy benefit managers, in making purchases from healthcare providers (Burns 2022). Insurance plans even cooperate in small clubs for the purpose of purchasing the services of larger clubs.
 
20
Petroleum exports by domestic consumers can also, in principle, occur indirectly by exporting manufactured products that are intensive in petroleum.
 
21
Alyousef & Stevens (2011) and Fattouh & El-Katiri (2013).
 
22
Associated Press (2002); Strazzante (2004).
 
23
Samuelson (1954).
 
24
See also Buchanan & Tullock (1962, Chapter 5).
 
25
Law prohibited the university from selling testing services in the marketplace until authorized by the U.S. Food and Drug Administration, which was not obtained (and then only on an emergency basis) until February 24, 2021.
 
26
Mulligan (2021). Even in economics, few studies have so far raised the possibility that schools, workplaces, and other institutions of civil society might be more effective at alleviating local externalities such as infectious disease. Leeson & Rouanet (2021) is one exception.
 
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Metadata
Title
Beyond Pigou: externalities and civil society in the supply–demand framework
Author
Casey B. Mulligan
Publication date
02-05-2023
Publisher
Springer US
Published in
Public Choice / Issue 1-2/2023
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI
https://doi.org/10.1007/s11127-023-01064-x

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