Saturday, July 16, 2005

re: Externalities

Hal Finney posted a long note on the Exi Chat list starting out with:
Seems like a lot of the problems we face could be solved if there were some reasonable scheme to compensate people for negative externalities.
Hal went on to talk about a number of situations where there are both positive and negative externalities and wondered how one could negotiate a more economically optimal outcome. There has been a fair amount of discussion in the blogs I read about an idea called Dominant Assurance Contracts (DAC) which seem well-suited to addressing just this problem. The idea of a DAC is based on an older idea called Assurance Contracts, in which individuals sign up to fund a public good. If enough people join in all the pledges are collected; otherwise, everyone gets their money back. (This idea has actually been implemented at Alex Tabarrok (who writes for the blog Marginal Revolution at extended this proposal several years ago. In his extension:
if the group goal is not met then everyone who offered to contribute is given their money back plus a bonus. It turns out thatit then becomes a dominant strategy to contribute and the public good is always provided!
The most recent blogging on the subject is by Mike Linksvayer. Kragen Sitaker has been pushing the idea, and wrote up a long description on his "thinking out loud" list. They've also been written up at Wikipedia.

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