Abstract
This paper provides a rigorous statement of the Coase theorem and establishes a formal equivalence between abstract allocative mechanisms attributed to Coase and Pigou. The model proceeds from output functions that reduce to production functions in special cases, thereby capturing effects that are obscured by conventional production and cost functions. The model also emphasizes fundamental differences in the characteristics of inputs (particularly land) that are implied in the construction of externality stories. Finally, the model embodies a clear distinction between local (e.g. nuisance) and global (e.g. pollution) externalities. The Coase theorem (as stated) is valid only in the former case.
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