5:THE MARKET ACHIEVEMENT OF OPTIMAL POLLUTION 1 PROPERTY RIGHTS, Chapter demonstrated that socaly opti! el of exonomis city does not cine withthe private optimum i tee ae ‘xem cons pres. The ie aie therefore how to each he ‘esi epimun. Some form of intereation by wovernen mou Seem fa be nevesury. Before looking at the various forms of ‘envlation tht might be applied eis important to probe ee futher to be sure that makes will not “natural” cae the pina of extemal it iste omtntion of one Schoo! of thought tha ven mares ‘ney not seu the epimam smote extemal they can be ey aly nudge in tat deen tout te ety To full Fegulitryscity involving tues or standaneaing Thi Die idea was fst propounded te x paper by Ronald Cone (1960) To Understand the argument we have fist to each the Seep of “propery ih ‘Despite the apparent meaning of te phrase, a propery sgh lates fo the ight to wea source. This aight mean thereto Calivae crops os ied that omned, the right toe ee oo Toney and the sight to we te aatral environment aw partsar vy, Such rights are rary. eve able: hey re ccs Infome way bythe genera aceped rales of soc. Te iho tunate and Joes aot uli erry with the htt gw oa oppes or even giant hogserd (which capable of casing Gut tevee sin ation) The rhs are sido be attenuated” Not thar property hs mch were than eeryy ngs, ‘ean refer to any goo or resource. Sani, the evionment 2 resource an hence “pogen ance scweeMerorormiaspoumON Ripns can be pra, ie. owned by eady ideale indivons communal whee thee ote propery nquesions ‘hare with ther The later Lindo propery soa st sommon prope. Befoe te oer nd gla, raring wat ‘hte common property many infu coud gat hana onthe land n'a fea many developing coun, land is owacd Smmurlly We conde in Chaps tsa 7 ter he way in ich propery righ ae held ep to expan th proces of mata ‘source degradation but fr (ht moment we are inter inthe feel nce of propery ik 2 THE POTENTIAL FOR MARKET BARGAINS IN EXTERNALITY gue. repens the task opal erst gra in Cape 4 esl tate unrelated the palit wily To operate st Or ‘het his eos are maximised But the oil optima at ‘The workings of teat und he gosto ssa opimam spear ‘obeiscomptine Now conser stuaon in which che sfire atthe property igh What hs means hat the salle haste rght nor Be Dolled spd the pole doesnt hae the igh to pit In hat fase the starting point surytheorin in Fue The vere ‘rl peer hat o pliton at all espace nd since he ha the Property es, ew wl bl th biggest sma. But om conser ete he vo pate pote nd eer = might ara over thelvel ofexteraiy. Saposethebsueiswbeinertomavet paid Dr no. they moved td, tbe pollster mea gain Oa in taal prof bw these: would lose Oc ut sins Oabd is preter ‘han Oca tae is potential or a ara. Very spy abe plistr ould afer to compere the ferry some aut eeu th ‘Oc, snd st than Osbd. The poler wil sil ave se poi Moreover, he sere wou be beter ff alu he wou los ‘cd, he wuld gain more than that In compentton, I such a ‘pain cond be sch the move to 6 wou be son to beh Improvement fr bath prt ouch a move known a 4 Pareto Improvement since teat one party ibter off und no pay 3 ay ‘ors of, Bul ifte move am O to dirs social improvement soit ‘he move to imp seen the guna lade so Thee‘gue 1 Optina potion by bupisin. ‘move o Q" But ay ove Lo the gh of * ot able case {he ellos net gals then become less than the sere ose = hence the pollster neat compessate the zee fo move beyond {Or Tha If we star tO andthe property Fights belong Win te Steer, there 2 aur" tendency To rove to Qt Soil puma Now imapice that the property rights are vested in he pote. ‘The raring point b Or beau that i the point to which Ce polar wg genta be as every right te the ovrommen forbia wate prodsc Buti now poable for he wo pris ‘ome together agin sed coer the move from Qe Dak fo Bat ‘Sitime the rllerreancompersnte he pour gve pacer mount fav Sine theres woud havea teleae alos of Bigr ifthe more of doesnot ake plat he vil be wling oe ‘ny amount kat than hs to make te move. The per wil be ‘ligt ace any aroun: greater than tbe poi be wi Tse to sender The potest fra bargain ext aun ad the ‘ove wil lice But the more tof a socal mproveent, {0's the move fiom 10 and fom to Q" Hence Q* onc gan ‘heel fatty to which the ster wil vite. ‘So long at we cam etalon a bargain betwen pollter and polled te maetet wil on the above argument take us 10" Which isthe socal epinum. ‘The pol importance of te Argument an ow be en, fo regards of who hols dhe propery ance scmermunrorornatsusenion 72 tiga, there tom automatic tendency lo speech the socal ‘piu, Thi ndings Known the Cone there, ater Conse UU9t0). ir coret we hae no med for goverment reps of xtemalty, forthe mare wi te car of tel $2, CRITICISMS OF THE COASE THEOREM Clery the theorm is of considerable pote inpotanee since t removes the aexaty of government regulation of pollution protems (and ao thrsenr to render the next fw chaps ‘edundaat Bu dept elegance, here are many probe mh ‘he Come there, We conde the anes ony ‘The tate of competion Chapter 4 wae cael to point et that the anny of pial tnteroalty stud pret competion Tt a nth bathe saw tat MNPB= P-MC MBC) eta (P= MSC) In trms of te bacining approach, what is beng astumed i tha MNPI isthe polluter’ barging cure With which be refers when deciding bow muck to puy. oF how much to apt. in Comgention Bet suppose that pect competion doer sot prevail Then P~ MC f mo Tonge he bargaining eure beets it ‘el ote equal to MNBL I the potter i afm it shoul be Fa evident thats bang ete his marginal prot care (Ge Appendix 41) and, under imperet competi, his unto ‘mortal oenee wins earpial os e Under imperet competition, MR i not gua P because te demand curve is above he marginal evenue cure I follows hat ‘hebarguningsolton doe ac py under imperfect competion ‘ov serio this as a rts cepends onto thog: Fist depends on ow diferent we thnk the rel worl x from perfectcompetion, Wile ome eonomin would argu tht he mount of ompetive inpertetion’ (or monopely is mt very ea eue View Uthat petet competion + comesient fin for conticting ‘corome mods tut i emote fom desribieg the sal word “Than te extent of inperet competion provides he bat ora Sesous elem ofthe Coase theorem. The Jocnd pom ie More ‘complied andi deeh with more formalin Appin 51 The nbs exe thatthe baring cre ofthe pelle ean be ‘Sed ae one relating jl tothe intrest of ple and ‘onruers. Tey need the 10 bargin withthe sllerrs of the Pallation. While the approsch is technical covet i regies Father fancalinvahemest of producer (pole) comumert ad Satferersallin one bargain Woes not thetefore sem sree “The absenee of bargains and he existene of ansetion “Thesecood tsi ofthe Comte theocem that we probably al er apres to hnk of eal word examples of sch Bergan {aking pac. tv tat nore set oneratingauhoren “ara wt the lea population to cept clear pve stations waste dso ates pehaps offering cah competion or 8 ontribaion to Teel faite Thee ave ane cnamgles of eration! bargains beeen cours that ele pollion ad us ta create, Butte ypc inl common property ‘sources, and we dea ah tht sa ter Det Chapter? niet {at externality Hey to be pervasive Benue of the materials ‘ance ence: Weshou therefore bale to point ay sch ‘ara rther than o aed examples. The fat tat eo nok cberve many expe othe bargains aking ple sages hat ‘here re either otal other, tha the Cat here "Te reiponse a those who bee ite matte basin approdch fx that tere ar indeed ober fo arguning in the form of ‘rumen cuts Sh co ntee hove of banging pares ‘ogee, ogeising ten widely atatuted an cat tosgenty sufferers te acta! arin self and so on he easton cote fe fo large that any one pany share of them outweighs the pected bene ofthe bargain ht pat wl withdraw fom the ‘bargin, or not even commence it Moreave, eae Ie hat ‘wansacions costs wil fall onthe pay that does no hae the ance scien opm rosin 75 propery righ, But rantatons costa are real cots ~ me have 9 Fear for treating them diferemy o tet ests i he eonarsy “Thus itramacton cons are very ipl we appear to besaving i ‘hate eat fhe bargin autwelgh ay ene that eas ie pina tat no barges. ‘Carried this level he argument quickly becotes edu, fo wna says het bagel te ne place they wil not "hey do, ben the aunt o exeealiy emerging il opin ( ‘the Cone theorem) they dont tak lay sao ota or Simply meas that ranean corte exceed expecid at beefs Hiom the bau. We have an uafaletheery shoot opin ster, aay tha ll the exteoaty we ebere sepia xray and hence tere no need oo any abou Bat {he proc! ales nn-aiabltteens td enc th argent enon iia. [Nonettle, he rans cst aaten serves to end ws ofsomiporat covets nny wesmendation sou resation of externa Simply because we ebuere extent i¢ doe nat mee that Something sos be done on ground af commie efieny we Pia be observing Pareto-releva external (Chapter), Tis {ind of take sin fet ery ommon WA sateen the eth‘ polionstoul be eisoat, or tebacs ming Soule probit nd 00 2. The exact of bigh wanscions cost might expiin why sprerment creation cece For high transactions ote 40 ‘ott that te extrait hopin tall instead ony Simply beth ovement nteveston cheaper and can achive Leting Ts traaaction cost, B= the ain om te basin fr the pry earig the rasan ont, and G= the ot government Fntervenon we right surmarie the posses a flows +17 Ba bargain might ak place (6 bow for ease why (hey ph not cer in thi cote. + INT 8 a bargun will aot ost, but rome ole segelary spproach mip occu + UTS'G< 8 eoveramentvepuatin kel tori, dit it te fica76 eomeues oF nLLTON Fina, note that whe tramuction cats may leave some of the gang teary inc, thet existence meas tbe optinal ee sty i no longer invartaet withthe allocation 8 propery ‘ah will mater who Beats the tasacton a5 dentiying the arsnig pats yen if rasttons costs ae est thn he beefs o be obtined from a began, ao bargin may take pace Many pollutants ae Tonge they sty ithe envionment or ng periods fine sed ‘a alles people yes, decades o even hundreds of years ‘ow, 0, pope wo ae going to be afeced by the paiton ‘uy not 3 exit and it then mot poset speak ofthe wo Paris coming together 10 argan. Toxic cemieas, radioaene ‘waste, cron yer depletion an gab earbon dioxide polation ll Fibs eateory, among many ether AL bn some groups inthe rent geeraton would have to bargin on bebo of fie {eeratins The ies of fre pnerations hang sock epesentar Terr of cous ot ancl” many repuatins elt oe Ad of sere ~ and typizy we expect grverament (0 ake on this oe ‘But the contests involved are sal eommon propery ones andthe ‘outcome wu some atenantin of he rake of plier, ‘A frie problem of Wentfjng the pliers and he steer les in cases of ope access esourees. Am open aces rere ik {ne owned by aabody (common property resources are owned by an ‘Uettiable group In such ner ot lar who would Bargain ‘wn whom soe no ee nda has a incentive wo voce Ms erase tothe resure. Lay, even i conventions! polation content it fen del to say whothe polar and sufleres re. ules may be unaware fa he sure of pallstion fom which hey sul, or even naar that damage i bring done. Th fen the cae form pollutants snd ener potas Indes, thi station seems likely to ‘harecterse the majoriy of polsion stuaons. The cons of geeraing the formation fr the steers eed bead he ‘ows of tating any bari ‘The lelbood of brgaes beg Soci fen even they secede a emote gies he ee ‘Wenify camage done and ite dtbation among sulleters. Of ute, thr Kind of problem will are for realty solaions as ‘ell Goverameat tae ad iaformation oe damage ance AcnEMETOFTMALFLLUTION 77 ‘Common property cote eset art rope ncn pa cnt ‘opery canoer. Each ser ates to resi his wage o he ‘source inthe ineret oft longterm sntnabe we forthe Communi asa whole, spl for ter generations. Th ele & ‘cooperative sclion to problem of surance. Each ini! ‘eed entrance that otber lee behave ine cooperative fbn, ‘erwise thee wl bea tempaton wo ‘rea ranks and sek he ‘masimom priate ain. Despite» voluminous theoreti and np Heratreontch'pne here stuationy, not ey {ersny why some common propery context are sujet 10 operative sitions and othe teak down. But rom the trrpaaing theory pest of view he imperial pat oot tat ‘ch wer ofthe common property is the oluter (or resource we) ‘vd each indvual meri so the beneficiary. Intern ofthe Previous diagrams, MNPB and MEC "elngta the ate people Rational eoopeativ individu wil therefore et ut he eons ‘eats to arrive a her own personal Q so tha the sur ofthe individual postions wil be the ail opium. Nontbles ite pay an inidal to move beyond Qi he ose jaggy canst {iy witht and mabe uy age shorter pan athe expense ‘he oe ers wad in the fre, ‘Tren-makiog ‘One other problem wih the bargaining sltin is tat it oles Dota for mating an econome stv ot of tes-maing. It eee compensates a pollster env th pole hat he prope) figs, open to tte ‘pele 1 enter the situation an to ‘demand compersuion, Thest-naking is hal a tatioeal se of ‘eareeeconeme eoutnt.Posbly he union ca bcorreted are defining whe eae to propery rhs egy Sesying ‘hem fo pote teat-akers, butt hast be acknowledge at ompeaation seeres for potential poles have afte ths ‘tent some cout is pose o recive government cash for no! engaping in colton, the Hea bang to pote ‘vironmental vauabie and and ede aca surple sem ily tint oe fares could ay thatthe are going att78 ecomnucsorronumion sa of wed vn I hey er lade a, gig “Compe inthe post The Cone thew inpocant is forcing sdvocaes of cvronmenta replion dae es tru ay hese tnre carl th hy igh eter hve dnc Butte ae ‘Benj mony why Soper toy anderen soc” Ab ‘ton ve any hp ew ere APPENDIX 5: RESURRECTING THE COASE THEOREM UNDER IMPERFECT COMPETITION Bochanan (1969) has sugested 2 may in whch the Coase theorem ight be reused under imperfect competition. Figure AS ‘hows the mperety compete fem toptber With the prof tmanising postion, the bargaining otcore i marinal prof Ifthe nagsning cove, andthe barging outeome If he Carve B MMe aed as he posers barpining sure, We ue tha Pique ASA Cua ga an inp conpeiton NaneerAQUEVEMENTOF pra POON P_MC=MEC dot sscure an optimum Bot P-MCianitegu te targa pol, 40 we ted to resterpet P~ MC- 1 infact 3 ‘oargiasupl crete magia hing in combed producer ed consumer supe ths rt egulle MEC ad the to cvs te bargining curves, then an opital outcome occur The Ipc tha he bargin now neds ak plas beeen the pole. the conser ofthe poles product, andthe sees Scck "teparste’ brgaiing restores the Conse theorem The problem, of cous, exactly what his means in prac since itis Ui o eninge och parte argiiglking lc. APPENDIX 52: NON-CONVEXITY AND THE MARKET BARGAIN THEOREM Several riers hae posted out that norma preemains of ttenaliy contents sume *el-bchaved marginal exeroa cst End maria prot fantom ric hls anigne sabe esooum iseures Faure AS2 shows some posible els of suing ‘non-convex In) we skow 3 dectesng MEC futon which cits MNPR fom abo nh tuaton xc esata ait E ‘Snot an optimut tal etemal costs exceed total private bees) forint sate egitiom sce to he rast of E pollen et ompesas salle to soe paition neater, ato tee of E:sferers can compesitepoltrs back to 2 eure ts (8) ‘MEC slopes dowawars but cts MB fom Slow. Tu thease Eis Sathatsle und an opium This) cae ty for the arginng solution, alhough we may note that, i rope, ih ae vests in poles and Qi therefore the staring poi, the abaeee ofa bargain wl bePrsco opal tiiesteral cots 1 Or ares than ol private bow, More tothe pst, ne st ‘ie whether deling MEC i at allenic One sunt = ‘seal that ms anna oe mere thn hei fie cnet I the ‘externality easing te im’ lor esches an amouot sult he em profi caleltd ar acne over var cot te fir wi Close down, casing.» aicominay ia the MEC curve sek Tat, MEC™=0 Ist lear, however, whether this parse aga resize to any sera problem. ei perhap beter ohne hit {seeing aint within which ny exteroaly corto policy a ak plac, Nor does mean ta he MEC Cae Bs fo pedownwards ove its whole fngh merely tha we have an event ‘Sacominaty Baumol and Besos (1972) nav, however, provi Sore general pot about non-conventy. Again the anagem {ime after i exernalie ut he esl spat to hd foal Categorie of externality The argument thatthe very entence of fuera! fess. maybe sulin to inde a non-conventy Stuntion Consider two. ido, P ich producer some Conmediy with potion a se effet, and which rodoes ‘Smmodity tht doc no polite bt fers he plain rom PI ° ° = 8 igus AS2 Noncomer MECeures swsseracusomeeror armas rttimow $1 Figure AS.) line OA shows he orp posi of inate? For ants of work (eet of rue) 10 ite of output ar ‘erurd. Fort unis wort, unis ouputaeecue.nPigure [AS1@) the supat pone of indy S xe thow Line OF ‘ows inp oupat combination when duty P dows ot produce Ball Line OM shows rece outputs per ui inut when ndst)P oes produc, sch that Salers the exert. Now case the Combined prodin poses, Wecan chow prodce at Ak Figure AS2o) in which cie we shall have the combination (GAL, 29, OS}, whee Ls gute, Or we can choose Bin Figue ‘AS in whch cae we have (HL, OP OS). But ive chow to ut some labour nto producing ome of both commediien, we al fac theft ofthe extemal. The pos units cf abort thch we sal have 10 unis of P, Bu al 10 wit ofS (at 20) because tpt tine OW is now operate, Hen, we sal have the combination (8 0P, 10S) If we plo the gat combinations to Produce production possi cure we oti Figure ASA. {ine PP. shows the production posi crv i here are no teria conta return care are would expect Line ‘Py shows the prductin posnibty env ts eaerahy exe The extemal hay has generated no conse inthe production possi wre. Fp ASS. Polite nd polite feFigs ASA Podstion pout wi ners 1m Fare AS3 the tol os of he Sindy ince a3 contanese Th mene tha the MEC crv ona). The {eral he poducton pouty cure scomne i sregtened Peahente idanry exponen # denny eae capt Torconhoeheeteralty prem oresgerenrs a nereing ‘tur opt faction when he exter ox peach (See the 1 cane wilting, Fr MEC 1a howe, oe Industry her experince an nreing stra fncon with lie exe orexpenence a devesing rts unto hou {ie cay, "somone importa nthe eal wok? Firs oe compl the posit of eight Sov singeat potion ‘ralaio weretobeimplemntd bt el sample dies {Sind IMEC might slope downverds fret reson, One polish dove damage, sing yet more may prose t ‘kecinngnagiaal umount dag. Sry, oct a re bat ‘en gcd to envonmetl Bh, paps owen» owing ‘rind ceopmen acing se orbs Few mos flores may rela te delning magna rage. Teese ‘merabar he safe fo sow that MEC nec not ope ance Acmevouertor rms roueTOn 8 aprards or be horizontal, Sut for al practical pape mon onvesity doet et atem to be x sent detraton from the ‘tly of polation conte pated in the semaine of this