The Coase Mechanism and the Iteration Argument

Ekkehart Schlicht

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: The “iteration argument” presented in Schlicht (1996) shows that the allocation of property rights may generate inefficiencies, contrary to what the “Coase Theorem,” as commonly understood, asserts. The argument may be summarized by saying that markets (and bargaining) cease to function properly if several people are entitled and prepared to engage in the same externality-ridden activity and each of them has to be bribed individually from being the first offender. Given that the harm from pollution does not rise linearily with the amount of pollution, the sum-total of the damages produced when all of the potential offenders engage in the harmful activity may be smaller than the sum-total of the bribes which must be offered to prevent each potential offender from starting the offensive activity, even if the ensuing social damages exceed the associated private returns and an inefficient outcome is obtained. If pollution without permission by the community is not permitted, a different – and in this case efficient – outcome results. This note illustrates the argument by means of a simple example. It is an excerpt of Schlicht (1997).

Keywords: claims; contract enforcement; contracts; entitlements; interactions; motivation; norms; obligations; rights (search for similar items in EconPapers)
JEL-codes: D02 D04 D23 D62 H23 K11 O50 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ene, nep-env and nep-law
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