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Can Coasean Bargaining Justify Pigouvian Taxation?

Listed author(s):
  • STEPHANIE ROSENKRANZ
  • PATRICK W. SCHMITZ

The fact that, according to the celebrated Coase Theorem, rational parties always try to exploit all gains from trade is usually taken as an argument "against" the necessity of government intervention through Pigouvian taxation in order to correct externalities. However, we show that the hold-up problem, which occurs if non-verifiable investments have external effects and parties cannot be prevented from always exploiting "ex post" gains from trade through Coasean bargaining, may be solved by government intervention. In this sense, the impossibility of ruling out Coasean bargaining (after investments are sunk) may in fact "justify" Pigouvian taxation. Copyright (c) The London School of Economics and Political Science 2006.

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 74 (2007)
Issue (Month): 296 (November)
Pages: 573-585

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Handle: RePEc:bla:econom:v:74:y:2007:i:296:p:573-585
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