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Environmental Regulation. Bargaining, Standards, Taxes & Fines, Trading of Emissions Allowances. The Coase Theorem. Under ideal conditions, efficient solutions to externalities are realized by bargaining among the affected parties, regardless of the assignment of property rights.
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Environmental Regulation Bargaining, Standards, Taxes & Fines, Trading of Emissions Allowances
The Coase Theorem • Under ideal conditions, efficient solutions to externalities are realized by bargaining among the affected parties, regardless of the assignment of property rights. • Coase’s Example: straying cattle • Is it an “Impossibility” Theorem? • Ignores equity – who gets bargaining rent • Ignores strategic possibilities • Extortion by threats to pollute • Ignores transaction costs • Organizing, free riders, cross state lines, smoking example
Taxes & Fines vs. Standards • Without regulation, private MC of pollution is less than social MC • Optimal tax • Raises private MC = social MC = MB (demand) • Collects tax revenue • Optimal fine similar, F* = MB • Standards reduce Q of polluting good • Same outcome as tax if set correctly • Preferred by producers since profits increase • Both entail enforcement costs • Monitor to enforce standard • Prevent tax evasion
Uncertainty and Heterogeneity • Set standard, PC*, expecting pollution control cost MC1 = MB • If true MC0 > MC1, impose excessive cost • If true MC2 < MC1, lose foregone benefits • Similar outcomes if MC varies across sites • Solutions • Differential standards – “new site bias” • Trade allowances to establish price • Netting, offsets, bubbles & banking
