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.
Bibliographical noteFunding Information:
The authors would like to thank Soren Anderson for pointing us to Cheshire case, Michael Springborn for the Central Valley example, and to Ben Hansen for the brownies. Matthew Kahn was instrumental in the initial stages of this paper. Two anonymous referees had excellent comments that helped improve the paper.
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- Coase Theorem
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