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Production Externalities and Long-run Equilibria: Bargaining and Pigovian Taxation

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  • Hamilton, Jonathan H
  • Sheshinski, Eytan
  • Slutsky, Steven M

Abstract

This paper analyzes bargaining and Pigovian taxation solutions to inefficiencies from production externalities with free entry. The Coase Theorem fails in a decentralized context, but remains valid if the property rights holder can act like a command economy planner. A less-powerful, price-taking rights holder's objective function is nonconcave, causing an inefficient bargaining outcome. Bargaining complicates Pigovian taxes with a nonlinear tax scheme required to sustain the optimum. Polluting firms pay a franchise tax whose revenue is given lump sum to consumers and face a marginal charge only on excess output, which, thus, raises no revenue in equilibrium. Copyright 1989 by Oxford University Press.

Suggested Citation

  • Hamilton, Jonathan H & Sheshinski, Eytan & Slutsky, Steven M, 1989. "Production Externalities and Long-run Equilibria: Bargaining and Pigovian Taxation," Economic Inquiry, Western Economic Association International, vol. 27(3), pages 453-471, July.
  • Handle: RePEc:oup:ecinqu:v:27:y:1989:i:3:p:453-71
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    Cited by:

    1. Stephen F. Hamilton, 1998. "Taxation, Fines, and Producer Liability Rules: Efficiency and Market Structure Implications," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 140-150, July.
    2. Allan C. DeSerpa, 1992. "The Pure Economics of the Coase Theorem," Eastern Economic Journal, Eastern Economic Association, vol. 18(3), pages 287-304, Summer.
    3. Grafton, Quentin R. & Devlin, Rose Anne, 1994. "Les permis d’émission et les charges : efficacité et substituabilité," L'Actualité Economique, Société Canadienne de Science Economique, vol. 70(2), pages 159-176, juin.
    4. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    5. Henry, Claude, 1991. "Finances publiques et environnement : tensions et convergences," L'Actualité Economique, Société Canadienne de Science Economique, vol. 67(3), pages 267-278, septembre.
    6. Brito, Dagobert L. & Hamilton, Jonathan H. & Intriligator, Michael D. & Sheshinski, Eytan & Slutsky, Steven M., 2006. "Private information, Coasian bargaining, and the second welfare theorem," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 871-895, May.

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