ABSTRACT
The use of the Pareto criterion refers to the subjective preferences of individuals engaged in trade exchanges, and the absence of externalities implies that trading activities only affect those directly involved, which in general implicates just two individuals. The interdependence of individuals' possibilities to satisfy their preferences is an unavoidable aspect that characterises even a so-called perfectly competitive environment. The institutional framework determines when an externality occurs and when it does not, and this recognition is exogenous to the operation of the market. This chapter expresses that without the active role of value judgements the solution to the problem presented by the existence of externalities is impossible. In any case, in order to capitalise on the dynamic efficiency properties of market-based instruments, exogenous valuations of externalities are required to be super-imposed over the functioning of the market.
