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Can Coasean bargaining justify Pigouvian taxation?

  • 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 to rule out Coasean bargaining (after investments are sunk) may in fact justify Pigouvian taxation.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse7_2006.pdf
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse7_2006.

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Length: 24
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:bon:bonedp:bgse7_2006
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Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany

Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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