A SOLUTION TO THE PROBLEM OF EXTERNALITIES AND PUBLIC GOODS WHEN AGENTS ARE WELL-INFORMED

I consider economic environments involving externalities and public goods where agents have full information but the regulator does not. For these environments I present a class of simple two-stage games whose subgame perfect equilibria are efficient allocations. In the case of two-party externalities, the equilibria involve compensation for the party upon whom the externality is inflicted. In the case of public goods, the equilibria are Lindahl allocations.

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