Internalizing Environmental Externalities and the Coase Theorem

Nicolas Schneider ()
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Nicolas Schneider: The London School of Economics and Political Science, Department of Geography and Environment

World Journal of Applied Economics, 2022, vol. 8, issue 2, 93-100

Abstract: This article offers a brief review of the Coase Theorem in the context of policy planning. This concept first revolutionized the regulatory approach to the environmental problem because it advocated how bargaining mechanisms correct externalities without any pre-condition on entitlement assignment. However, given a set of non-negligible constraints imposed by the empirics i.e., non-null transaction costs and asymmetric income effects, questions remain on how decentralized decision-making processes, i.e., private market mechanisms, can ensure Pareto-efficiency in practice without undermining the local validation of the theorem. Starting from major theoretical underpinnings, this brief highlights that active regulation of externalities by governments is relevant under reasonable conditions. Far from being empirically inadequate, Coase’s transaction-cost-free model must be seen as a demonstration of how transaction costs cause substantial distortions and inefficiencies when excluded from environmental policy frameworks. Thus, Coasian bargaining and Pigouvian taxation may be complements rather than substitutes. Active public environmental intervention could act as a backup system capable of correcting inefficiencies when market mechanisms and private negotiations fail to do so.

Keywords: Coase Theorem; Environmental externalities; Property rights (search for similar items in EconPapers)
JEL-codes: C78 H23 Q50 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:ana:journl:v:8:y:2022:i:2:p:93-100

DOI: 10.22440/wjae.8.2.4

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