Efficiency and nonlinear pricing in nonconvex environments with externalities: A generalization of the Lindahl equilibrium concept

Abstract

It is a 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. 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 >Generalized Lindahl Equilibrium> attains local pareto efficiency for its associated allocations and is able to support (in the usual sense) any pareto efficient allocation that satisfies a regularity condition. © 1987.