Public policy toward pecuniary externalities

Pecuniary externalities create third-party effects through changes in relat ive prices or asset prices. Unlike technological externalities, they do not misallocate resources and are necessary for the market to work efficiently . However the political process does not differentiate pecuniary from techn ological externalities and often tries to prevent pecuniary externalities, which creates resource misallocations. The article shows how pecuniary exte rnalities function in markets, why the political process takes account of p ecuniary externalities, and why public policy toward pecuniary externalitie s results in resource misallocations.