Pricing of Pollution: The Coase Theorem in the Long Run
Volume: Volume 4, No. 1
Issue: Spring 1973
Pages: pp. 316-319
Authors: H.E. Frech III
Title: Pricing of Pollution: The Coase Theorem in the Long Run
Abstract: In an earlier article in The Bell Journal, Tybout argues that even in a zero transaction costs model, bribery to reduce pollution and compensation charges for it result in different total profits, and thus in different long-run behavior. Therefore, the Coase Theorem is refuted for the long-run case.
This paper demonstrates that Tybout's result is based on a fundamental error in the analysis of costs for the polluting and polluted industries. The property right to the polluted (air or water) basin is a valuable asset with a definite market value. When the rent of this variable asset is properly included in the costs of the industry holding the right, marginal and total profits are shown to be identical regardless of the assignment of the basin ownership.
JEL Classification
Welfare Theory Externalities (0244)
Conservation and Pollution (7220)