Externalities and the Coase Theorem


The Coase theorem is a method of tackling the inefficiency caused by an externality, by awarding property rights to the externality to one party and allowing the parties concerned to bargain their way to an efficient solution. In the case of a negative externality such as pollution, the property right to pollute could be awarded to the polluter, and the victim of the pollution would have to offer to pay to get the polluter to reduce their output. Alternatively, the property right to clean air/water/whatever else is being polluted, could be awarded to the victim, so the polluter would have to offer to pay the victim to be allowed to pollute.

Consider the situation where we have a firm, firm A, producing some good in a competitive market that causes some pollution as a result of its output. Another firm, firm B, which produces a different good in a different…

View original post 1,513 more words

This entry was posted in economics on by .

About Jim Rose

Utopia - you are standing in it promotes a classical liberal view of the world and champion the mass flourishing of humanity through capitalism and the rule of law. The origin of the blog is explained in the first blog post at https://utopiayouarestandinginit.wordpress.com/2014/03/12/why-call-my-blog-utopia-you-are-standing-in-it/

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.