Coase theorem
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The Coase theorem postulates the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem is significant because, if true, it would be possible for privat
By graphing the Jones family's marginal benefit curve and the marginal cost curve for pear tree production, we can find the efficient number of trees to be produced for the Jones family alone (this occurs when MBJones = MC), which happens to be 3. However, when we consider the positive externality we can see that the marginal benefit to society is greater than the marginal benefit to the Jones family alone. Using the new marginal benefit curve, MB
Illustration of the effect of initial allocation on final distribution. The Coase theorem fails to take account of the fact that those who have rights are disinclined to give them up.
Arthur Cecil Pigou
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Arthur Cecil Pigou was an English economist. As a teacher and builder of the School of Economics at the University of Cambridge, he trained and influenced many Cambridge economists who went on to take
Coase theorem
…markets and to the polluter pays principle in taxation. Notwithstanding these restrictive assumptions, the equivalence version helps to underscore the Pigouvian fallacies that motivated Coase. Pigouvian taxation is revealed as not the only way to internalize an externality. Market and contractual institutions…
Arthur Cecil Pigou, c. 1918-1921.