Coasean versus Pigovian solutions to the problem of social cost: the role of common entitlements

Figures & Tables

Pigou’s and Coase’s solutions to externalities, as stated by Coase (1960).

Pigou’s solution as seen by Coase	Coase’s solution
The essence of the problem of externality:
One person A in the course of rendering services to B incidentally renders services or disservices also to C. Hence, there is only one direction of the effect – from A to C.	The problem is reciprocal in nature: An externality issue is actually about the use of a resource – the party that uses the resource always harms the other party.
The solution to the problem of externality:
The government (the central planner) should intervene directly through centralised instruments:	The government (the central planner) should define and allocate entitlements and then, if reallocation is beneficial, net of associated costs,
– Quantity regulation (bans)	– Either the market will operate through Coasean bargains,
– Monetary tools (taxes or subsidies)	– Or a firm (or another entity, e.g. an association) will internalise the externality.

Methodological differences between Pigovian solutions and Coasean market solutions to externalities, as interpreted by Coase (1960).

Pigovian solutions	Coasean market solutions (Coasean bargaining)
Main feature: aimed at establishing centralized rules and monetary (fiscal) instruments (e.g. taxes and fees)	Main feature: aimed at defining property rights that should be (re)allocated by the market by means of Coasean bargaining
The solution to the externality problem is defined by the central body. Who should provide compensation and who should be compensated are defined in advance – before the specific problem has emerged? The parties concerned cannot choose between alternative uses of re sources There is no competition between agents and alternative uses of resources The connection between benefits and responsibilities exists only as defined by rules and regulations.	The solution to the externality problem is defined by decentralized agents Who should provide compensation and who should be compensated are defined by Coasean bargaining in the course of the negotiations. The parties concerned can choose between alternative uses of resources There is a direct and indispensable connection between benefits and responsibilities due to private entitlements