Question

Briefly explain the limitations of the Coase Theorem.

Answer 1

There are limitations to the Coase theorem. If there are multiple polluters, or more than one party affected by the pollution, the assignment of property rights actually can determine the level of pollution. Take, for example, a plant that expels waste into a river. If the river flows through two towns, the one that is further way incurs fewer costs associated with cleaning the water. The amount each town is willing to pay to reduce waste would be different, and therefore the allocation of property rights among the plant and the two towns could determine the outcome. Another limitation becomes clear when we consider transaction costs such as measurement and enforcement. For example, if more than one firm is polluting, determining how much pollution is coming from each firm could be costly or difficult. These costs could be more significant than property rights in determining the level of pollution.