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::::: "[[President Obama]] has articulated to the American people that a new program called [[cap and trade]] is a market-based way to combat pollution. Does the Coase theorem justify [[cap and trade]]? Why or why not?"
::::: "[[President Obama]] has articulated to the American people that a new program called [[cap and trade]] is a market-based way to combat pollution. Does the Coase theorem justify [[cap and trade]]? Why or why not?"
::::: ''No. The Coase theorem only states that the efficient outcome will be reached regardless of initial property allocation (or legal entitement) when there are zero transaction costs and when there is strong rule of law. Necessarily of course, these legal obligations can exist only between private parties who are then able to negotiate and bargain freely and in full faith. The Coase theorem does not state that the government can arbitrarily set a quota and simply expect that that level would be the optimum level. Under cap and trade, there is no legal way for private parties to exceed the government quota. For example, the cheapest method to deal with the negative effects of carbon emissions may be to plant trees or it may even be determined there is only a negligible effect on overall welfare. A cap, or quota, on emissions leaves private parties no legal recourse to explore these innovative methods of combatting pollution.''
::::: ''No. The Coase theorem only states that the efficient outcome will be reached regardless of initial property allocation (or legal entitement) when there are zero transaction costs and when there is strong rule of law. Necessarily of course, these legal obligations can exist only between private parties who are then able to negotiate and bargain freely and in full faith.''
::::: "Is the outcome generated after implementation of [[cap and trade]] optimal? Why or why not?"
::::: "Is the outcome generated after implementation of [[cap and trade]] optimal? Why or why not?"
::::: ''No. The Coase theorem does not state that the government can arbitrarily set a quota and simply expect that that level would be the optimum level. Under cap and trade, there is no legal way for private parties to exceed the government quota. Under the assumptions of the Coase theorem the government never imposes a restriction on pursuing the optimal outcome, just potentially a legal entitlement only between private parties. For example, the cheapest method to deal with the negative effects of carbon emissions may be to plant trees (or it may even be determined there is only a negligible effect on overall welfare.) Under the assumptions of the Coase theorem, the polluter may be obligated to pay the specific injured party an arbitrary payment for each unit of pollution. However then, there exists an infinite number of ways for the private parties to bargain to achieve the optimal outcome, including even the injured party subsidizing the polluter to continue production so he can still receive payments. A cap, or quota, on emissions leaves private parties no legal recourse to explore these innovative methods of combatting pollution.''
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