Walter P. Heller

On the Nature of Externalities

Publisher Summary All externalities in the nature of public goods or bads is commonly accepted and occasionally argued in vague terms but never rigorously justified. This chapter explores the nature of externalities from a rigorous and analytic viewpoint. An externality is defined to be a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses in Pareto efficiency. It is general enough to include both pecuniary and nonpecuniary externalities, and it provides a key to determining the types of economic situations that are likely to lead to externalities. The situations usually identified with externality have more fundamental explanations in terms of difficulties in defining private property, noncompetitive behavior, absence of relevant economic information, or non-convexities in transactions sets.

Capital Market Imperfection, the Consumption Function, and the Effectiveness of Fiscal Policy

I. Income and consumption, 455.—II. Optimal consumption plans subject to borrowing constraint, 457.—III. Dependence of consumption on income in the short run: a consumption function, 460.—IV. Summary, 462.

Equilibrium with Non-convex Transactions Costs: Monetary and Non-monetary Economies

Publisher Summary This chapter discusses the equilibrium with nonconvex transactions costs for monetary and nonmonetary economies. The idea that transaction costs display a scale economy is commonplace. This cost structure enters essentially as an explanation of the demand for inventories of goods, and for idle balances of money. Hence, a theory of a monetary economy with nonconvex transaction costs is a necessary generalization of the transaction cost theory so far developed. The now standard technique in a discrete finite economy is to approximate the nonconvex economy by a convex economy. Equilibrium is established for the (artificial) convex economy, and finally it is shown that a small reallocation from this point represents an approximate equilibrium for the nonconvex economy. The equilibrium includes idle balances of money and inventories of goods. Both are held to economize on transaction costs. The model uses the individualized transactions technologies of Kurz to formalize the idea of a nonconvexity facing individual agents. Nonconvexities in transactions cost may provide a strong motive for making transactions and payments in large discrete amounts rather than smaller or, indeed, continuous amounts.

Two-part marginal cost pricing equilibria: Existence and efficiency

Two-part tariffs are explored in a general equilibrium model with increasing returns to scale. Two-part marginal cost pricing equilibria are not generally Paretoefficient. The Second Fundamental Theorem of Welfare Economics may also fail. We introduce a notion of consumer surplus as the willingness to pay for access to the increasing returns good. The individualss hookup charge is set to a fixed fraction of his consumer surplus. If aggregate consumer surplus exceeds the losses of the regulated monopoly, then exact two-part marginal cost pricing equilibria exist. Further, for efficient allocations having positive net surplus, the Second Fundamental Theorem of Welfare Economics holds.

Equilibrium Market Formation Causes Missing Markets

I present a general equilibrium theory of market formation. The structure of markets is not taken as a primitive, but rather as an outcome of the theory. A new class of decision-making agents is introduced, the marketmakers. The theory is then based on the information structure and the incentives of these marketmakers. First, a partial equilibrium information structure is assumed. Next, two polar cases of incentive structures for marketmakers are presented: monopoly and perfect competition. I then use the theory to give an explanation of missing markets. Examples are given where missing markets arise out of complementarities among marketmakers. These agents are rationally forecasting their projected demands and supplies. Too many markets may be formed when there are setup costs to setting up markets. This can happen despite rational profit calculations by the marketmakers.