Externality and Institutions

Pollution, higher traffic noise, or a poisoned river are all examples of externalities - costs (or benefits) which are imposed by an action but which are not built in to the price of that action. One of the problems of economic theory is whether, when analyzing the desirability of a new road, for example, the costs that occur as externalities can be fully incorporated into the price of that road. Dr Andreas Papandreou has provided a book which explains and analyzes the ideas lying behind the theory of externalities. Papandreou has made a survey of the various methodological approaches taken by economists to the issue of eternalities, and the failure of some markets to reconcile individual and social costs and benefits. He tackles the difficult issue of defining or characterizing externalities, surveys the current literature, and investigates the effect that externality theory has had on major economic issues. His major theme is an exploration of institutional inefficiency and the implications of incorporating organizational costs into economic models.