Applying the Coase theorem to optimize levels of environmental investment screening

Abstract

The current paper applies the Coase theorem (Coase, 1960) to environmental investment screening. The Coase theorem is a legal and economic theory focused on explaining how parties when facing a situation involving externalities can reach economic efficiency without government intervention. Through secondary research, the paper examines practices in environmental investment screening, trends in the costs of screening, and trends in the costs of pollution. My findings are in four folds: (1) environmental screening incurs cost, (2) exclusion of environmental screening incurs costs, (3) environmental screening costs are declining, and (4) the cost per unit of pollution is increasing. Applying these findings to the Coase theorem, we conceptually identify an equilibrium point for the optimal level of environmental screening. I further show that the equilibrium point is shifting towards a higher level of environmental screening. The paper thus provides an efficiency-based argument for higher levels of environmental investment screening.