From Market Failure To Government Failure: The Evolution Of Externality Theory And Policy

The thesis concentrates on the topic of the evolution of externality theory and policy experiencing almost one hundred years.It tries to analyze the historical stages and internal logic of that evolution, and draws conclusions that the evolution of externality theory and policy is closely related with the rise and fall of government interventionism, it should be complementary in functions of government regulation and of market regulation.According to the thesis, the evolution of externality theory had gone through four milestones:Marshall, Pigou, Coase and Buchanan. Coase's externality policy were consistent with Pigou's in essential;"market failure - government regulation―government failure-regulation relaxing"is the logic clue of the evolution of externality policy. The function of market mechanism and government regulation complement each other, that is a new perspective in externality policy.The first chapter illuminates the theoretical foundation of externality, including the definition, meanings, types of externality and its effects on the efficiency of resource allocation. Externality is an effect that one market body impact on another's welfare. When externality occurs, the actions of economic bodies seeking maximum benefit would not make for maximum welfare of society,so it can reduce the efficiency of resource allocation.Chapter 2 analyzes the formation and development of the traditional externality theory and policy represented by Pigou. Using the marginal analysis method of neo-classical economics, Pigou studied the problem of externality systematically, and drawn the conclusions that government should to regulate the economy in order to offset the market failure. Pigou's theory could be called the traditional externality theory. Traditional Externality theory was born on the background of that people reflected the defect of free market system. Sidgwick, Marshall, Pigou, Baumol and other economist gave the very important contributions to the formation and development of the traditional externality theory.Chapter 3 concentrates on the topic of market failure from the perspective of externality. Phenomena of market failure such as Monopoly, public goods, asymmetric information,are inherently consistent with the problem of externality. The traditional Externality policy stressed the rationality of government regulation; it was regarded as a good plan offset the market failure and put into practice in many countries.Chapter 4 summarizes the externality theory of new institutional economics. As a representative of new institutional economics, Coase studied the problem of externality using the concept of property rights and transaction cost and brought out the meanings of the famous "Coase Theorem". The externality theory of new institutional economics is a breakthrough for traditional externality theory and policy. "Pigouvian Tax" is inherently consistent with Coase's policy of transaction of property rights. From the viewpoint of efficiency, provided that the transaction cost is zero, Pigou's policy and transactions of property rights policy was identical. When the transaction costs more than zero, we must choose the best policy by compared the costs of them, and choose the less cost one.Chapter 5 analyzes the government failure from the perspective of externality theory. Public Choice School studied the political issues using Economics methods, and brought out the systemic theory of government failure. They believe that the government is also an "economic person" seeking maximum of benefit like a firm or a consumer in most of the time. Government behaviors has externality, it is a derivative cost that government imposes on others. There are some subjective and objective reasons for the emergence of government externality. The government externality is one of the major forms of government failure; it is also the source of "North's Paradox ". Therefore, the study of government externality is an important direction of development of externality theory.Chapter 6 analyzes the new changes in the study field of externality theory. The new changes mainly include the dynamic analysis of the externality theory, the expansion of the externality theory in intergeneration, international and of the focus issues. The symbol of the dynamic analysis of externality theory is the study of the role of increasing returns in economic growth. The network externality, intergenerational externality and international externality are becoming the focus issues in externality theory. New classical economics presented by Xiao Yang pushes the study of the externality theory to a higher stage. Chapter 7 is conclusions of the article. In the process of evolution of externality theory and policy, the study methods of externality theory trend to diversified, and the concept of externality trends to extensive. The evolution of externality theory and policy reflects the rise and fall of the government interventionism. It is the best externality policy that the functions of government regulation and of market mechanism complement each other.