The extent of voluntary cooperation in the presence of externalities is shown as an equilib- rium outcome in the supply and demand framework. The analysis uses familiar ingredients to provide a new way of understanding the results of the extensive literature beginning with Buchanan, Coase, Ostrom, Shapley, Telser, Tullock, and Williamson showing that a Pigou- vian tax is not the only alternative to independently acting individuals who are coordinated merely through distorted market prices. Voluntary cooperation transforms the character of the costs resulting from externalities and may have a far different incidence than Pigouvian taxes and subsidies do. The paper discusses applications including forest management, vol- ume discounts, residential associations, energy policy, the scope of planning of household activities, and the role of workplaces in preventing infectious disease.
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