Sharing the surplus: A just and efficient proposal for environments with externalities


Economic activities, both on the macro and micro level, often entail wide-spread externalities. This in turn leads to disputes regarding the compensation levels to the various parties affected. We propose a general, yet simple, method of deciding upon the distribution of the gains (costs) of cooperation in the presence of externalities. This method is shown to be the unique one satisfying several desirable properties. Furthermore, we illustrate the use of this method to resolve the sharing of benefits generated by international climate control agreements.

Published as: Sharing the Surplus: an Extension of the Shapley Value for Environments with Externalities in Journal of Economic Theory , Vol. 135, No. 1, 339--356, January, 2007