Chapter 7. Mechanism Design for the Environment

We argue that when externalities such as pollution are nonexcludable, agents must be compelled to participate in a “mechanism” to ensure a Pareto-efficient outcome. We survey some of the main findings of the mechanism-design (implementation-theory) literature – such as the Nash implementation theorem, the Gibbard–Satterthwaite theorem, the Vickrey–Clarke–Groves mechanism, and the Arrow/d’Aspremont–Gerard–Varet mechanism – and consider their implications for the environment, in particular the reduction of aggregate emissions of pollution. We consider the cases of both complete and incomplete information.