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Firm Property Rights, Bargaining, and Internalization

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Coase's seminal 1960 paper on externalities is associated with the so-called Coase Theorem which is stated in the literature in many forms. However, its main thrust was less to state a theorem than to challenge Pigou's earlier insistence on the need for government intervention through Pigouvian taxes to achieve internalisation of externalities. Coase argued instead that private party bargaining can be relied upon to internalise externalities, but equally insisted that establishing clear and firm property rights is a precondition to successful internalisation achieving bargaining. Similar thinking has lead to clear definitions of property rights becoming a key part of World Bank conditionality in the environmental area. This paper discusses the underpinnings of this position, arguing that it is little researched and subject to challenge. We first show how Coase only considered one type of property right, and where others such as compensation rights are allowed for the property right assignment will itself directly achieve internalisation with no need for further bargaining. We also show how ambiguous property rights can dominate a clear assignment of property rights for a case where recipients of damage can move to avoid damage, but must remain and actually receive damage in order to be recipients of compensation. Rights to either polluters to pollute, or to recipients of damage to compensation create a distortion; and either outcome is dominated by no assignment of property rights, but a tax on polluters (Pigouvian tax) with revenues redistributed equally to the whole population.

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Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 20031.

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Date of creation: 2003
Date of revision: Nov 2002
Handle: RePEc:uwo:uwowop:20031
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Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2

Phone: 519-661-2111 Ext.85244
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  1. Hurwicz, Leonid, 1999. " Revisiting Externalities," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(2), pages 225-245.
  2. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  3. Coase, R H, 1992. "The Institutional Structure of Production," American Economic Review, American Economic Association, vol. 82(4), pages 713-719, September.
  4. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, December.
  5. DeSerpa, Allan C., 1994. "Pigou and Coase : A mathematical reconciliation," Journal of Public Economics, Elsevier, vol. 54(2), pages 267-286, June.
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