FUNDAMENTAL NONCONVEXITIES IN ARROVIAN MARKETS AND A COASIAN SOLUTIONTO THE PROBLEM OF EXTERNALITIES

D. Starrett [J. Econ. Theory 4(1972), 180-199] argues that the presenc e of externalities implies Fundamental nonconvexities which cause Arro w markets to fail. While this is true, we argue this failure is due to the structure of the Arrovian markets that Starrett uses, and not to the presence of externalities as such. We provide an extension of a ge neral equilibrium public goods model in which properly rights are expl icitly treated. Nonconvexities are not fundamental in this framework. We define a notion of Coasian equilibrium for this economy, and show f irst and second welfare theorems. In this context, the first welfare t heorem is a type of Cease theorem. (C) 1997 Academic Press.