Pure Global Externalities: International Efficiency and Equity

Abstract

The pollution issue raises the familiar problem of social goods and the prisoner’s dilemma that follows. There, the supply of the social good, if left to individual choice, will fall short of the optimal level, since each actor will allow only for own internal benefits. In the case of social bads, the damage-generating activity will be over-extended, since the individual actor will allow only for internal damage cost, while disregarding the external cost imposed outside and on others. Hence there arises a similar need for a cooperative solution, with a twofold concern for securing an efficient and equitable outcome.

I wish to acknowledge the helpful coments of the two discussants, Bernard Herber and Robert Kohn, as well as those of an anonymous referee.