Efficiency and nonlinear pricing in nonconvex environments with externalities: A generalization of the Lindahl equilibrium concept
It is well-known fact that if damaging externalities occur, nonconvexities will necessarily arise in the underlying economic environment rendering questionable the relevance of standard market approaches to the allocation problem. For neither the existence of a competitive equilibrium nor the usefulness of this equilibrium concept for supporting efficient allocations is guaranteed if the underlying economy does not enjoy the usual properties... In response to this state of affairs, we define and study a generalization of the Lindahl Equilibrium concept that allows for nonlinear pricing systems in which the marginal outlay may depend on the quantity purchased. This equilibrium concept, the Generalized Lindahl Equilibrium (GLE), requires the specification of the following list of items: an allocation, a set of personalized pricing parameters, a benchmark for the public good \(\bar y,\) and a maximum deviation from this benchmark, \(\bar r,\) allowed to the agents. Such a specification is defined to be a GLE if the proposed allocation is feasible for the economy as a whole and optimal for each individual agent when taking the pricing parameters, benchmark and maximum deviation as given. The GLE concept always attains local Pareto efficiency... and, even in nonconvex environments, is able to support (in the usual sense) any Pareto efficient allocation which satisfies certain regularity assumption. (Quotations from the abstract and the introduction.) The idea of the proof is the following: Pareto efficiency requires that a suitably defined upper preference set has to be disjoint from the set of production possibilities. Therefore, these two latter sets can always be separated by a possibly nonlinear manifold irrespectively of their convexity. The assumptions ensure that the separation is achieved by simple quadratic pricing schedules. In the presence of nonconvexities, a GLE can clearly only satisfy efficiency in some restricted, local sense.
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