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The Environment and Emerging Development Issues: Volume 1$
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Partha Dasgupta and Karl-Göran Mäler

Print publication date: 2000

Print ISBN-13: 9780199240692

Published to Oxford Scholarship Online: September 2007

DOI: 10.1093/acprof:oso/9780199240692.001.0001

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On a Clear Day, You Can See the Coase Theorem

On a Clear Day, You Can See the Coase Theorem

(p.35) 2 On a Clear Day, You Can See the Coase Theorem
The Environment and Emerging Development Issues: Volume 1

Barry Nalebuff

Oxford University Press

The Coase theorem states that with zero transaction costs, private and social costs will be equal and the value of production will be maximized. Absence of transaction costs means the world is a single economic unit. The Coase theorem gives us a good insight into local level problems. Assigning property rights to one of the parties (it does not matter whether it is to the polluter or the pollutee) results in efficient allocation. However, some problems may arise when the theorem is applied on a grander scale, such as in the cases of water pollution, acid rain, even depletion of the ozone layer. When applied on a global scale, although assigning property rights leads to a socially efficient outcome in the absence of transaction costs, the transaction costs at this scale could be so enormous as to outweigh the original externality problem. Some implications are considered.

Keywords:   property rights, uncertainty, efficient allocation, water pollution, acid rain, ozone layer

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