Externality Theory And Policy Boundaries

The thesis centers on the topic of "externality theory and policy boundaries". In order to examine the boundary of externality policy, the thesis tries to find shortcomings in traditional theory of market failure. The thesis contains two important challenges to theory of market failure. One focuses on the nature of externality, the other on the boundary of externality policy. All the discussions are based on the appointed formula as follows:R =R (X1A, X2A, X3A, ...XNA, CNB) ...(2.1)RA represents cost-benefit function of A, X1A, X2A, X3A, ...XNA represent economic resources which consumed by A to increase his benefit. All these resources are under control of A; CNB represents influence of B on A, but CNB is out of A's control. So we call B as the externality actor and A as acceptor.By the first challenge, we have seven new findings on externality:(l) Externality is the subset belonging to the existing form of interdependence. The subset is within three boundaries. The first is separation of the decision units; The second is institution failure (not market failure). But within the last boundary of "Optimal Enforcement", externality is efficient. (2) Externality causes individual rationality to deviate from group rationality. The intensity of externality can induce some institution that can lower the effect of externality and result individual rationality in accordance with group rationality. The changes of environment can accelerate the effect of externality, which causes deviation and accordance again, that is repeating in cycles. So externality is the tension between individual rationality and group rationality. (3) In effective market missing theory, the missing of externality means optimal,the existence of externality also means optimal because of the high cost. Therefore externality and market missing are the automatic protective mechanism for the market system. (4) Public goods are the special form of externality. (5) The emergence of monopoly can induce externality, while it is also a spontaneous market solution to externality. Despite of the expanding of market scale, the more important part of market development is continuous division of labor and diversity of product. The diversity can eliminate detrimental externality, now monopoly represents efficiency and the profits from monopoly can be regarded as the rewards of eliminating externality. Under the situation up-mentioned, it is meaningless to emphasize the ideal situation of complete competition. The complicated and confusing relation between monopoly and externality indicates the complexity within real economic system. (6) The emergence of externality is related to information. Asymmetric information and uncertainty can induce externality, while externality may enhance asymmetric information and uncertainty on certain degree. This relationship is similar to the paradox of "egg and chicken". The rethinking about value of asymmetric information and uncertainty assures us of following viewpoint for market. Asymmetric information and uncertainty are "hormone" to regulate "metabolism" of market, instead of the factors to disintegrating the market. (7) Simple externality can evolve complex externauty and the costs of externality will be expanded, therefore the externality system may be the chaos.The second challenge is based on the seven new findings up-mentioned. Which criticizes the traditional externality policy involving Pigouvian tax and subsidy, the direct interference of government, the market solution of property right transaction, court negotiation, NGO action and the "optimal externality" goal of policies. The criticism isbased on four aspectsr(1) On account of the relationship between externality and incomplete competition;(2) On account of the government failure ;(3) On account of complex externality;(4) On account of the intergenerational externality. The conclusion is that although shortcomings in the traditional externality policy are common, but property right transaction, court negotiation and NGO ac...