Externalities, pigouvian corrections, and risk attitudes

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We examine the influence of risk attitudes on the provision of an externality and on the proper size of Pigouvian correction when the externality is a random variable whose distribution is affected by an observable externality-generating activity. An intervening technology relates changes in this observable activity to the probability distribution of the relevant externality. Unlike the now-standard result in the theory of the firm involving the influence of risk attitudes on output levels, we cannot conclude that increases in risk aversion will lead necessarily to a reduction in the level of the externality. Our results are applied to a wide range of market failures. © 1988.




Sandler, T., & Sterbenz, F. P. (1988). Externalities, pigouvian corrections, and risk attitudes. Journal of Environmental Economics and Management, 15(4), 488–504. https://doi.org/10.1016/0095-0696(88)90041-1

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