Fundamental nonconvexities in the theory of externalities

Climate agreements in a mitigation-adaptation game

“…Different from some recent work by Barrett (2008) and Benchekroun et al (2016) who study IEAs, we work in a much more general framework, which also allows for the possibility of strategic complementarities in mitigation space, and derive most of our results analytically. Secondly, there is a literature on non-convexities of negative externalities, including early contributions by Baumol and Bradford (1972), Laffont (1976) and Starrett (1972). This literature does not consider agreement formation but points to the strategic interaction between public and private actions, which can result in non-convexities.…”

Competitive Market Mechanisms as Social Choice Procedures

“…A detailed analysis is presented in Hammond (1998). A major complication pointed out by Starrett (1972) is that negative externalities of this kind are incompatible with convex production possibilities, so the usual second efficiency theorem is inapplicable.…”

In Search of an Alternative to Shareholder Value Maximization

“…He showed that the equivalence between a competitive equilibrium involving profit-maximizing firms and a Pareto optimum can be restored if markets for external effects can be created. However, employing Arrow's framework, where the commodity space is extended to include the rights to generate externalities as additional commodities, Starrett (1972) demonstrated that the presence of detrimental production externalities creates fundamental nonconvexities in the technology sets of firms. This fundamental relationship between externalities and nonconvex production is all the more relevant today with the development of a market aimed at internalizing the polluting externalities related to the emissions of greenhouse gases (Funza (2010)).…”