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Clement Clement
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Posts: 356
A week ago

Question 1.

What are some of the limitations of the Coase theorem in practice?



Question 2.

Ronald Coase is famous for the Coase Theorem, which is based on the premise that there is an economically efficient level of pollution reduction. Many economists believe that the tradable emissions allowance program that has been used to deal with the problem of acid rain has been successful in reducing emissions of sulfur dioxide in an economically efficient manner. Why isn't this program an example of the Coase Theorem?

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gumpfablegumpfable
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A week ago
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Answer 1

Some limitations of the theorem are as follows. First, the Coase theorem works only if the transactions costs are low, which is unlikely if there are many bargaining parties. Second, private solutions to the problem of externalities will occur only if all parties to the agreement have full information about the costs and benefits associated with the externality. In reality, this may not be likely or may be difficult to ensure. Third, all parties must be willing to accept a reasonable agreement. For example, if those suffering from the effects of pollution do not have information on the costs of reducing pollution it is unlikely that parties can reach an agreement. Unreasonable demands can hinder an agreement.



Answer 2

The Coase Theorem states that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities. Tradable emissions allowance programs are one type of market-based solution to the problem of negative externalities, but these programs are initiated by government, not private parties.

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