Question

Explain the Coase Theorem, its significance, and its limitations.

Answer 1

The rule of Coase states that when a company produces better emission performance, the level of pollution remains the same whether the company or the government is given property rights. If the company is granted property rights, the government (e.g. the city) charges the company to minimize its emissions, and its willingness to pay depends on the benefits it gets from a cleaner environment. If the city owns the property, the company will have to pay for its right to pollute, and its contribution will be determined by how much polluting it will benefit. The amount of pollution decided upon in any case is where the additional benefits to the paying party are less than the additional costs.The equilibrium level of pollution, according to the Coase theorem, is the same either way; the difference is who pays, the private entity or the public, in this case the city

The Coase Theorem applies to situations where one party's economic activities impose a cost or damage to another party's property. Depending on the mediation which takes place during the Coase Theorem process, funds may be given either to compensate one party for the actions of the other party or to pay the party whose conduct induces the damages to forgo the activity.

The Coase theorem has limits. If the pollution involves several polluters or more than one group, the allocation of property rights will ultimately determine the level of pollution. Take a plant that expels waste into a river, for example. If the river flows between two cities, there are less costs associated with cleaning the water in the one that is further back. The price every town was willing to pay to reduce waste would be different, and the outcome could therefore be decided by allocating property rights between the plant and the two towns. When we consider transaction costs such as measurement and enforcement, another limitation becomes clear. For example, if more than one company is polluting, it could be costly or difficult to determine how much pollution comes from each company. These costs may be more significant in determining the level of pollution than property rights.