Externalities and Compensation: Primeval Games and Solutions

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The classical literature (Pigou (1920), Coase (1960), Arrow (1970)) and the relatively recent studies (cf.Varian (1994)) associate the externality problem with efficiency.This paper focuses explicitly on the compensation problem in the context of externalities.To capture the features of inter-individual externalities, this paper constructs a new game-theoretic framework: primeval games.These games are used to design normative compensation rules for the underlying compensation problems: the marginalistic rule, the concession rule, and the primeval rule.Characterizations of the marginalistic rule and the concession rule are provided and specific properties of the primeval rule are studied.
Original languageEnglish
Place of PublicationTilburg
Number of pages28
Publication statusPublished - 2005

Publication series

NameCentER Discussion Paper


  • externality
  • compensation
  • primeval games
  • marginalistic rule
  • concession rule
  • primeval rule


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