A solution to the problem of consumption externalities

This paper considers the problem of incentive mechanism design that results in efficient allo-cations for economies with consumption externalities when preferences, individual endowments, and coalition patterns among individuals are unknown to the planner. We do so by introducing the notion of constrained distributive Lindahl equilibrium. We give a mechanism that implements constrained distributive Lindahl allocations in Nash and strong Nash equilibria. Since the Pigouvian mechanism is a special case of the distributive Lindahl mechanism, the mechanism also implements the Pigouvian allocations. The mechanism is feasible and continuous. It works not only for three or more agents, but also for two-agent economies