Consumption Externalities and Pigouvian Ranking - A Generalized Cobb-Douglas Example

This paper analyzes the impact of consumption externalities on the quot;Pigouvian ranking,'quot; according to which the second-best level of public good provision is smaller than the first-best level. Consumption externalities introduce exceptions to the Pigouvian ranking. Two necessary and sufficient conditions for reversal of the Pigouvian ranking are identified, when preferences for private goods (Cobb-Douglas) and the public good are weakly separable: (i) consumption generates a negative externality, (ii) utility is not too concave in the subutility of private goods. If preferences are strongly separable in the public good, the Pigouvian ranking is reversed if and only if the second-best consumption price is lower than the corrective (Pigouvian) consumption price