Detrimental Externalities, Pollution Rights, and the “Coase Theorem”

John Chipman and Guoqiang Tian

A chapter in The Economics of the Global Environment, 2016, pp 473-492 from Springer

Abstract: Abstract This paper, which builds on Chipman (The economist’s vision. Essays in modern economic perspectives, 131–162, 1998), analyzes a simple model formulated by Hurwicz (Japan World Economics 7:49–74, 1995) of two agents—a polluter and a pollutee—and two commodities: “money” (standing for an exchangeable private good desired by both agents) and “pollution” (a public commodity desired by the polluter but undesired by the pollutee). There is also a government which issues legal rights to the two agents to emit a certain amount of pollution, which can be bought and sold with money. It is assumed that both agents act as price-takers in the market for pollution rights, so that competitive equilibrium is possible. The “Coase theorem” (so-called by Stigler (The theory of price, 1966) asserts that the equilibrium amount of pollution is independent of the allocation of pollution rights. A sufficient condition for this was (in another context) obtained by Edgeworth (Giorn Economics 2:233–245, 1891), namely that preferences of the two agents be “parallel” in the money commodity, whose marginal utility is constant. Hurwicz (Japan World Economics 7:49–74, 1995) argued that this parallelism is also necessary. This paper, which provides an exposition of the problem, raises some questions about this result, and provides an alternative necessary and sufficient condition.

Keywords: Coase theorem; Parallel preferences; Pollution rights (search for similar items in EconPapers)
JEL-codes: H40 K00 Q53 (search for similar items in EconPapers)
Date: 2016
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Journal Article: Detrimental externalities, pollution rights, and the “Coase theorem” (2012)
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DOI: 10.1007/978-3-319-31943-8_21

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