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Detrimental Externalities, Pollution Rights, and the “Coase Theorem”

In: The Economics of the Global Environment

Author

Listed:
  • John S. Chipman

    (University of Minnesota)

  • Guoqiang Tian

    (Texas A & M University)

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.

Suggested Citation

  • John S. Chipman & Guoqiang Tian, 2016. "Detrimental Externalities, Pollution Rights, and the “Coase Theorem”," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 473-492, Springer.
    • Handle: RePEc:spr:steccp:978-3-319-31943-8_21
    DOI: 10.1007/978-3-319-31943-8_21
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    2. Nicolas Schneider, 2022. "Internalizing Environmental Externalities and the Coase Theorem," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 8(2), pages 93-100, December.
    3. Gao, Jingzhe & Wei, Haixiao, 2025. "Impact of differentiated green incentive policies on traditional and certified green product markets," International Review of Financial Analysis, Elsevier, vol. 106(C).
    4. Alfred Endres & Tim Friehe & Bianca Rundshagen, 2015. "“It’s All in the Mix!”- Internalizing externalities with R&D subsidies and environmental liability," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 44(1), pages 151-178, January.
    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. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Larry Karp & Jiangfeng Zhang, 2016. "Taxes Versus Quantities for a Stock Pollutant with Endogenous Abatement Costs and Asymmetric Information," Studies in Economic Theory, in: Graciela Chichilnisky & Armon Rezai (ed.), The Economics of the Global Environment, pages 493-533, Springer.
    11. Rongbing Huang & Xiaomin Zou, 2025. "Accountability audits of natural resources and industrial green total factor productivity: evidence from China," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 12(1), pages 1-17, December.
    12. 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.
    13. 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.
    14. 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.
    15. 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.
    16. Marcus Berliant & Shin-Kun Peng & Ping Wang, 2014. "Taxing pollution: agglomeration and welfare consequences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(3), pages 665-704, April.
    17. 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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    Keywords

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    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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