Discussion on Part I

Professor Edmond S. Phelps, the invited discussant, noted that, under the Coase theorem, when nations imposed costs on one another and found resource allocations non-optimal, they could enter contractual arrangements compensating one another so that marginal costs were made equal to marginal benefits. Typically, however, the prisoners’ dilemma model was the one that applies. Countries did not reach a compatible agreement and, therefore, there were spillover costs. He agreed with the reasons posited by Professor Streeten as to why such agreements could not be reached and added one more to the list, the difficulties encountered in the implementation of contracts and agreements and in prosecuting defaulters. He continued, the problem in applying the Coase theory lay in the uncertainties and probabilities involved in estimating the marginal social benefits and the marginal social costs and in estimating the extent of the externalities that affect countries other than the ones directly involved. At best, these were subjective estimates. At worst, they were a lie. From the perspective of economic theory, the prisoners’ dilemma model was the more relevant.