Question

If the socially optimal pollution level does not currently exist, outline some reasons as to why applying the Coase Theorem may not be successful in attaining it.

Answer 1

To understand why coarse theorem may not be successful it is first necessary to understand what coarse theorem says. Coarse theorem says that Assignment of property right even in the presence of externalities will allow bargain such that an efficient solution can be obtained. To solve this problem let’s take an example of a refinery industry who pollutes the river and recreational industry who use this river .If the property right is given to refinery industry then recreational industry will be willing to pay compensation to refinery industry to stop production or setup pollution abatement plant and this payment will be less than the negative externality associated with refinery industry. At social optimal level of pollution marginal cost of pollution abatement is just equal to the marginal benefit from pollution abatement and if it is not known then the bargaining between the recreational industry and refinery industry is not possible because the recreational industry will not be knowing how much payment it should make to refinery industry which would be equal to benefit associated by abatement of pollution and when the bargaining will not take place between recreation user of river and refinery industry who is polluter of river then the refinery industry won’t cut its production or setup pollution abatement plant so it will keep on polluting river and socially optimal level of pollution cannot be attained