Coase demonstrated, the parties can trade the right so that whichever entity values it most ends up owning it. Efficient trading of the right to pollute moves society towards the optimal amount and allocation of the pollution. The idea is central to the cap and trade approach to reducing greenhouse gases and other pollutants.
In its editorial remembering Coase, the cap-and-trade-hating Wall Street Journal stated the principle of the Coase Theorem reasonably well, but then its conclusion echoed much of the right-wing press on Coase’s passing: “The too frequent assumption of modern government is that it can play the role of teacher, even when its taxes or regulation raise costs or otherwise make things worse. The Pigovians have had a political renaissance since the 2008 financial crisis, touting the virtues of regulation. But as we see the results, the Coasians are due for a comeback.”
Whoa! Coase was clearly skeptical of government regulation, but he recognized – indeed advocated — that government must establish and enforce property rights for efficient trade to take place. The costs it imposes on the polluters isn’t part of the calculation, just recognition that the total costs to society can be mitigated by facilitating such trade.
It is ironic and disappointing to hear some commentators laud Coase while at the same time saying that cap-and-trade would be too costly to the U.S. economy. The WSJ editorial page, and many others of similar inclination, have argued instead that “the market” will solve pollution problems without government intervention. That’s not Prof. Coase; that’s Prof. Ostrich, the one with his head in the sand.
Hat tip: Professor Stavins