Sharing the surplus: An extension of the Shapley value for environments with externalities

Economic activities, both on the macro and micro level, often entail wide-spread externalities. This in turn leads to disputes regarding the compensation levels to the various parties affected. We propose a method of deciding upon the distribution of the gains (costs) of cooperation in the presence of externalities when forming the grand coalition is efficient. We show that any sharing rule satisfying efficiency, linearity, dummy player and a strong symmetry axioms can be obtained through an average game. Adding an additional axiom, we identify one unique rule satisfying other properties. JEL Classification numbers: D62, C71.