Stiglitz, Externality and Government
7 Pages Posted: 1 Jul 2009 Last revised: 2 Jul 2009
Date Written: June 28, 2009
Joseph Stiglitz shared the Nobel Prize in 2001 partly on the basis of an important paper of his (with Greenwald): "Externalities in Economies with Imperfect Information and Incomplete Markets." In that paper he says: "There exist government interventions (e.g., taxes and subsidies) that can make everyone better off." Stiglitz is a prolific, outspoken, and outstanding spokesman for the pro-government school. This paper of his is supposed to provide the intellectual and analytical foundation for government intervention. I will argue that this important and oft-cited paper, while containing no mathematical errors, completely fails to prove the potential worth of government interventions. It assumes the result that it attempts to prove. Stiglitz has given us an inadequate and incomplete theory with inconsistent and ad hoc assumptions. His equations contain no theory of government whatever and for that reason alone they cannot possibly provide us with real-world prescriptions. In addition, Stiglitz ignores a long list of serious issues that undermine his prescription in favor of government interventions.
Keywords: Stiglitz, externality, government, intervention, Pareto optimality
JEL Classification: D62, D72, H10, H11, H23, H41
Suggested Citation: Suggested Citation