Gary D. Libecap is a Distinguished Professor of Corporate Environmental Management in the Bren School of Environmental Science & Management and Distinguished Professor of Economics at the University of California, Santa Barbara. This post is based on his working paper.
Governance and transaction cost insights of Williamson and Coase provide understanding of firm structures, management strategies, and antitrust. Economizing on transaction costs within firms and markets explains efficient adaptation. Neither Williamson nor Coase, however, explore political exchange and rent-seeking (Krueger 1974, Tullock 2005) in the policy arena where transaction cost efficiencies play little role.
Coase (1960) argued that automatic imposition of a Pigouvian “polluter pays” tax placed all adjustment costs on the “polluter” and granted disproportionate benefits to the “pollutee.” The resulting differential incentives led “pollutees” to seek unwarranted, nonoptimal outcomes, driving up costs and making marginal net social benefits negative, lowering aggregate welfare. Moreover, because they did not provide a property right, government policy mandates that inflicted differential costs and benefits were not tradable in response to new information. A government-imposed remedy for externalities could be more costly than the problem. His counter was to acknowledge the reciprocal nature of externalities across polluters and pollutees, assign tradable property rights, and allow for bargaining for mitigation. With exchange, marginal willingness-to-pay would be equated with marginal willingness-to-accept among the trading partners. Through voluntary, open trade, private marginal costs and benefits would become equalized, and serious imbalances in costs and benefits avoided. A more optimal externality level would result with all parties having a tie to negotiated outcomes.
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