Guest post from Jim Roumasset:
Krugman’s reproduction of Pigou and the rabbits illustrates that Pigou was not a Pigouvian. This is not surprising since Coase is not a Coasean, just as Keynes was not a Keynesian (Axel Leijonhufvud). Coase is misrepresented by both the weak and strong versions of the Coase Theorem and better represented by the equivalence version whereby the contractual equilibrium, universal market equilibrium (with permits), and the Pigouvian equilibrium with Holterman victim compensation. The equivalence version achieves the Coasean mission of undermining the inevitability of Pigouvian taxation and replaces blackboard economics with a mandate for comparative institutional analysis.
But as Pigou’s reference to the landlord and tenant internalizing spillovers attests, he was clearly aware of the possibility of negotiation, when it is not inhibited by what we now call transaction costs. In this sense, Pigou anticipated Coase’s (and Williamson/Ostrom’s) New Institutional Economics. Surprising indeed.