Chapter 7

Production Externalities


Chapter 7 analyzes production externalities with pollution serving as the main example to illustrate the theory. After developing the general model, the chapter turns to a number of specific issues, including a comparison of taxes and subsidies to reduce pollution, the advisibility of compensating the victims of pollution, Coase bargaining to solve pollution problems, and the possibility of nonconvexities with production externalities.


Aggregate production externality; Nonconvex production possibilities; Pareto-optimal conditions; Pigovian tax; Production externality

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