A Constitution for Solving Asymmetric Externality Games

Externalities, such as pollution, represent an important class of social problems that can be resolved by political institutions. This work investigated two key questions raised by these situations: What is the effect of using a given political institution, such as simple majority rule, to resolve externalities? More important, are there constitutionally prescribed institutions that will generate appropriate outcomes? We developed a model in which citizens benefit asymmetrically from producing an externality. Any one citizen's production, however, imposes an equal cost on all citizens. In this technology, a pollution chosen by majority rule generally leads to suboptimal outcomes. We show that an alternative institution is optimal. A citizen, whom we call the setter, volunteers to select the charge. If his choice is approved unanimously, the charge is enacted. Otherwise, everyone produces. The constitutional mechanism is such that the correct setter is induced to volunteer. The resulting allocation maximizes net social benefits. As a result of the uniform and linear nature of the externality cost, this optimal allocation is obtained without making strong assumptions about the information held by citizens. Specifically, attaining the optimal allocation is not dependent on citizens' knowing the production benefits or actions of others.