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Externalities in Economies with Imperfect Information and Incomplete Markets

Bruce C. Greenwald and Joseph E. Stiglitz
The Quarterly Journal of Economics
Vol. 101, No. 2 (May, 1986), pp. 229-264
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/1891114
Page Count: 36
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Externalities in Economies with Imperfect Information and Incomplete Markets
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Abstract

This paper presents a simple, general framework for analyzing externalities in economies with incomplete markets and imperfect information. By identifying the pecuniary effects of these externalities that net out, the paper simplifies the problem of determining when tax interventions are Pareto improving. The approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained Pareto optima. It can also lead to simple tests, based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection, signaling, moral hazard, incomplete contingent claims markets, and queue rationing equilibria.

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