*I would like to thank Heski Bar-Isaac, William Dickens, Christiaan Hogendorn, Scott Savage, Konstantinos Serfes and seminar participants at CUNY FFPP for helpful comments. The Editor and an anonymous referee provided suggestions that helped greatly in the revision of this paper.
NEGATIVE EXTERNALITIES, COMPETITION AND CONSUMER CHOICE*
Version of Record online: 27 SEP 2011
© 2011 The Author. The Journal of Industrial Economics © 2011 Blackwell Publishing Ltd and the Editorial Board of The Journal of Industrial Economics
The Journal of Industrial Economics
Volume 59, Issue 3, pages 396–421, September 2011
How to Cite
NAGLER, M. G. (2011), NEGATIVE EXTERNALITIES, COMPETITION AND CONSUMER CHOICE. The Journal of Industrial Economics, 59: 396–421. doi: 10.1111/j.1467-6451.2011.00458.x
- Issue online: 27 SEP 2011
- Version of Record online: 27 SEP 2011
Consumers sometimes make choices that impose greater external costs on those who do not make the same choice. This paper examines how the selectivity of negative externalities in such situations affects the competitive equilibrium and the desirability of an externality-reducing public policy. Selective negative externalities create network externalities, but outcomes may differ greatly from typical network effects. Price effects may cause the imposing product's sales to decline with the size of the negative externality. Consequently, a positive competitive effect may overwhelm the externality's negative direct effects on welfare, such that a policy that enlarges the externality may improve welfare.