Applications of the Coase Theorem

TL;DR

This paper reviews the historical context, experimental tests, and practical applications of the Coase Theorem in environmental economics, highlighting its limited but pragmatic role in addressing externalities.

Contribution

It provides a comprehensive survey of the Coase Theorem's assumptions, experimental validation, and real-world applications in environmental issues.

Findings

Experimental tests reveal assumptions often do not hold in practice.

Coasian bargaining can be a pragmatic solution for complex externalities.

Applications vary depending on whether the polluter or pollutee bears costs.

Abstract

The Coase Theorem has a central place in the theory of environmental economics and regulation. But its applicability for solving real-world externality problems remains debated. In this paper, 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 in the laboratory. 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. While limited in scope, Coasian bargaining over externalities offers a pragmatic solution to problems that are difficult to solve in any other way.