The Efficiency of Competition as an Allocator of Resources: II. External Economies of Consumption

Abstract

Economists have long been aware of the interdependence of the consumption and the consumption plans of individuals. For the most part they have been interested in the implications of this interdependence for the theory of market behaviour rather than in its implications for welfare. The purpose of this article is to give a detailed diagrammatic treatment of the welfare implications of external economies and diseconomies of consumption. In particular, we shall discuss the fiscal measures which, in a competitive economy, would provide the incentives necessary to the attainment of an optimal allocation of resources.We shall distinguish from each other, and consider separately, three types of interdependence of consumption and consumption plans.(i) The consumption of a particular commodity X by a particular individual A may increase (decrease) the satisfactions of other individuals, that is, generate external economies (diseconomies).(ii) The consumption of a particular commodity X may change the satisfactions of other individuals independently of the identity of the consumer.(iii) The receipt of money income by a particular individual A may, independently of his manner of disposal of the income, change the satisfactions of other individuals.No doubt this classification is not exhaustive. Thus no place is found for various external repercussions of consumption which might be discussed in a dynamic model, that is, in a model permitting instability of preference maps. Even in static models a place could be found for types of interdependence not discussed here. Many of these excluded types, however, can be described as combinations of those already enumerated (for example, a particular act of consumption may lower the satisfaction of some, raise that of other individuals) and can be treated by the techniques to be developed for their analysis.