“Exceptional and Unimportant”? Externalities, Competitive Equilibrium, and the Myth of a Pigovian Tradition

The notion of a Pigovian tradition in externality theory, against which Ronald Coase and others reacted beginning in the 1960s, has a long history. This article, though, suggests that the literature of economics evidences no such tradition, and that the discussion of externalities largely disappeared from the literature following Pigou’s 1920 treatment, only to reemerge, in very different form, in the 1950s. Such concern as there was with externalities was largely technical-as an impediment to the attainment of an efficient equilibrium-rather than with externalities as important real-world phenomena that required addressing via “Pigovian” policy instruments. It was only in the late 1950s and 1960s, with the growing social and political concern about large-scale pollution, that externality analysis came to capture the attention of economists, but even this early work on environmental topics was less straightforwardly Pigovian than one might expect.

Duke Scholars

Author Steven G. Medema Economics