Abstract
This paper works towards drawing a proper relationship between the Coasean and Pigovian approaches that should be based on the distinction between individual/private and shared/common entitlements. Because of the specific goals of his work, Coase (1960) does not make an explicit distinction between the two types of property rights; however, there are basic differences in their management, so this distinction is essential. According to Coase, the definition of property rights facilitates the optimal allocation of private entitlements through Coasean bargaining and market transactions. This paper suggests that shared/common entitlements should also be taken into account. The shared/common entitlements alternative is so important that it should be explicitly outlined in Coase’s entitlement optimisation assumption. When resources are shared among members of groups and communities, Coasean bargaining and market deals may be carried out only after co-owners organize and collective management is established in order to negotiate the reallocation of entitlements. For Coasean bargaining to take place in these situations, centralized (i.e. Pigovian) rules and regulations should first be adopted by the groups/communities. Hence, in cases of common property rights, the Coasean and Pigovian approaches are complementary to one another. In such cases, Coasean bargaining is not a rejection of centralized Pigovian regulation but is a means to its improvement. And vice versa: relevant Pigovian rules adopted by the co-owners of entitlements are necessary institutional arrangements enabling Coasean market solutions.
Highlights
Ronald Coase’s “The Problem of Social Cost” is one of the most cited articles in economics, law and social science, and one of the most debated works in these fields
This paper works towards drawing a proper relationship between the Coasean and Pigovian approaches that should be based on the distinction between individual/private and shared/common entitlements
When resources are shared among members of groups and communities, Coasean bargaining and market deals may be carried out only after co-owners organize and collective management is established in order to negotiate the reallocation of entitlements
Summary
Ronald Coase’s “The Problem of Social Cost” is one of the most cited articles in economics, law and social science, and one of the most debated works in these fields. Researchers have noted that in “The Problem of Social Cost” Coase is concerned only with cases of externalities between two parties (Schwab 1987; Major et al 2016), but few have analysed the implications of collective negotiations and actions Like some of these researchers, I support the view that “coordinating the desires of multiple parties” is the “largest impediment” to reaching an efficient Coasean solution (Calabresi 1968, 68; Schwab 1987, 267). I do not analyse in detail solutions to externalities proposed by Pigou in, e.g. “The Economics of Welfare” (1932), because my goal is to examine the implications of Coase’s solution
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