Environmental applications of the Coase Theorem

The Coase Theorem has a central place in the theory of environmental economics and regulation. Its applicability for solving real-world externality problems remains debated. We first place this seminal contribution in its historical context. We then survey the experimental literature that has tested the importance of the many, often tacit assumptions in the Coase Theorem. We discuss a selection of applications of the Coase Theorem to actual environmental problems, distinguishing between situations in which the polluter or the pollutee pays. Most substantive examples of Coase-like bargaining involve more than two parties. It is not clear whether the outcomes of these bargains were Pareto optimal rather than merely Pareto improving. While limited in scope, Coasian bargaining over externalities offers a pragmatic solution to problems that are difficult to solve in any other way.

Automated summary

The Coase Theorem plays a central role in environmental economics and regulation, but its applicability in solving real-world externality problems is still debated. Experimental studies have tested the importance of assumptions in the theorem, and most Coase-like bargaining examples involve multiple parties, with uncertain outcomes in terms of Pareto optimality.