Of Coase and Carbon: The Coase Theorem in Environmental Economics, 1960-1979

Abstract

The diffusion of the Coase theorem into the economics literature has many facets, one of which lies in its use and treatment by environmental economists. This paper examines the first two decades of this history, a period during which the theorem’s validity was widely acknowledged but its relevance for the economic analysis of the environment was almost universally dismissed, generally on the grounds of the theorem’s perceived irrelevance for dealing with the large-scale environmental issues - e.g., air and water pollution - that loomed large in the social conscience and preoccupied environmental economists during this period. The strident critiques of the theorem that we observe in the 1970s environmental economics literature evidence a measure of hostility toward the theorem and the suggestions by some (generally outside of environmental economics proper) that it offered a prescription for dealing with large-scale environmental problems. This attitude is shown to be grounded in concerns about normative factors such as equity and qualms about leaving solutions to environmental issues to the market. The repeated claims of the theorem’s irrelevance and the attendant dismissive treatment of it in this literature raises the question of why it was that environmental economists were so interested in the Coase theorem, and several possible explanations are offered, including the roots of environmental economic theory in the theory of externalities, the fascination of economists with interesting theoretical puzzles such as that posed by the theorem, and the normative and ideological aura that permeated discussions of the theorem inside and outside of environmental economics.

Keywords: Coase theorem, environmental economics, property rights, transaction costs

JEL Classification: B2, D62, H23, K00, Q2