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Detrimental externalities, pollution rights, and the “Coase theorem”

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  • John Chipman
  • Guoqiang Tian

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.
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  • John Chipman & Guoqiang Tian, 2012. "Detrimental externalities, pollution rights, and the “Coase theorem”," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(2), pages 309-327, February.
    • Handle: RePEc:spr:joecth:v:49:y:2012:i:2:p:309-327
    DOI: 10.1007/s00199-011-0602-1
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    References listed on IDEAS

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    5. Geir B. Asheim & Tapan Mitra & Bertil Tungodden, 2016. "Sustainable Recursive Social Welfare Functions," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 165-190, Springer.
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    10. Luc Lauwers, 2016. "Intergenerational Equity, Efficiency, and Constructibility," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 191-206, Springer.
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    Cited by:

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    3. Geir B. Asheim & Tapan Mitra & Bertil Tungodden, 2016. "Sustainable Recursive Social Welfare Functions," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 165-190, Springer.
    4. Prajit K. Dutta & Roy Radner, 2016. "Capital Growth in a Global Warming Model: Will China and India Sign a Climate Treaty?," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 277-310, Springer.
    5. Jean-Marc Burniaux & Joaquim Oliveira Martins, 2016. "Carbon Leakages: A General Equilibrium View," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 341-363, Springer.
    6. Elinor Ostrom, 2016. "Nested Externalities and Polycentric Institutions: Must We Wait for Global Solutions to Climate Change Before Taking Actions at Other Scales?," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 259-276, Springer.
    7. Luc Lauwers, 2016. "Intergenerational Equity, Efficiency, and Constructibility," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 191-206, Springer.
    8. Graciela Chichilnisky, 2016. "Sustainable Markets with Short Sales," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 147-162, Springer.
    9. Carlos Hervés-Beloso & Emma Moreno-García, 2022. "Revisiting the Coase theorem," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(2), pages 421-438, April.
    10. Techer, Kevin, 2021. "Stable agreements through liability rules: A multi-choice game approach to the social cost problem," Mathematical Social Sciences, Elsevier, vol. 111(C), pages 77-88.
    11. Shihong Zeng & Jiuying Chen, 2016. "Forecasting the Allocation Ratio of Carbon Emission Allowance Currency for 2020 and 2030 in China," Sustainability, MDPI, vol. 8(7), pages 1-28, July.
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    14. Armon Rezai & Duncan K. Foley & Lance Taylor, 2016. "Global Warming and Economic Externalities," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 447-470, Springer.

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    More about this item

    Keywords

    Coase theorem; Parallel preferences; Pollution rights; Q53; H40; K00;
    All these keywords.

    JEL classification:

    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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