The Sveriges Riksbank Prize in Economic Sciences 2007

Collective goods If a collective project, such as a bridge, is to be built, how can we determine that the total benefits provided by the bridge exceed the total cost when various stakeholders have private information about their valuations and also have incentives not to reveal their degree of interest? How do we design a toll system that provides adequate revenues and is fair? Should we impose low tolls that result in more traffic or high tolls that lead to less traffic?

The allocation mechanisms most often studied by economists are markets. Previously economists have shown that markets lead to efficient use of resources under ideal circumstances. With the help of mechanism design theory we now know that the market is often the best available institution even when conditions are less than ideal. For example double auctions, when both buyers and sellers submit bids, offer an unrivalled way of allocating goods of commonly known quality even when there is little competition. If the seller alone can determine the rules of play, the theory shows that certain common forms of auction, in which the buyers make bids, yield the greatest expected return (see page 6).

| The 2007 Laureates in Economics | Rational rules | Private information and voting | Environmental protection and auctions | Collective goods and markets | Mechanism design theory | Further reading and credits |
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