ABSTRACT
Economists normally do not conclude that pecuniary externalities have important efficiency impacts. The notion is that small price changes and related changes in market exchange due to shifts in demand or supply have only distributional consequences on third parties that net out across relevant consumers and producers (Scitovsky 1954). With imperfect information and incomplete competition, however, pecuniary externalities could have productive implications because they impede the adjustment process. Under these circumstances, mitigating government tax and subsidy policies could be Pareto improving (Greenwald and Stiglitz 1986). This literature, however, does not make clear what factors impede a response to price change or develop how associated distributional outcomes could lead negatively-affected parties to devote real resources to block entry and exchange.
