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« Going with Coase against Coase : The Dynamic Approach to the Internalization of External Effects »


  • Keppler, Jan Horst


The article develops R. H. Coase’s insight that the level of transaction costs in the market determines the amount of externalities, thus providing arguments against government intervention. Contrary to Coase, however, we argue that the level of transaction costs cannot be considered as given, and that there is therefore a case for selective and innovative government intervention to reduce such transaction costs. Externalities are approached as intrinsically new and dynamic impacts, whose transaction costs diminish over time, a process that can be accelerated by appropriate government action. In contrast, internalization by means of public intervention through Pigouvian taxation is shown to be epistemologically untenable: if externalities had sufficient information content to allow governments to determine optimal tax levels, these same externalities would already have been fully internalized by the market. The final part of the article proposes two internalization strategies based on a dynamic re-interpretation of the Coasean approach. The first aims at developing feedback mechanisms between generators of externalities and those affected by them through media other than the market. The second seeks to reduce transaction costs in order to extend the domain in which markets can operate effectively by proposing codification strategies for the informational complexities characterizing externalities.

Suggested Citation

  • Keppler, Jan Horst, 2010. "« Going with Coase against Coase : The Dynamic Approach to the Internalization of External Effects »," MPRA Paper 30081, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:30081

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    References listed on IDEAS

    1. Keppler, Jan Horst, 1998. "Externalities, Fixed Costs and Information," Kyklos, Wiley Blackwell, vol. 51(4), pages 547-563.
    2. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249.
    3. Pommerehne, Werner W., 1978. "Institutional approaches to public expenditure : Empirical evidence from Swiss municipalities," Journal of Public Economics, Elsevier, vol. 9(2), pages 255-280, April.
    4. repec:dau:papers:123456789/142 is not listed on IDEAS
    5. Peter A. Diamond & Jerry A. Hausman, 1994. "Contingent Valuation: Is Some Number Better than No Number?," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 45-64, Fall.
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    Cited by:

    1. Keppler, Jan Horst, 2017. "Rationales for capacity remuneration mechanisms: Security of supply externalities and asymmetric investment incentives," Energy Policy, Elsevier, vol. 105(C), pages 562-570.

    More about this item


    External effects; incomplete information; environmental economics; transaction costs; codification; dynamic internalization;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy


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