13 Pages Posted: 22 Oct 2007
The fact that, according to the celebrated Coase Theorem, rational parties always try to exploit all gains from trade is usually taken as an argument against the necessity of government intervention through Pigouvian taxation in order to correct externalities. However, we show that the hold-up problem, which occurs if non-verifiable investments have external effects and parties cannot be prevented from always exploiting ex post gains from trade through Coasean bargaining, may be solved by government intervention. In this sense, the impossibility of ruling out Coasean bargaining (after investments are sunk) may in fact justify Pigouvian taxation.
Suggested Citation: Suggested Citation
Rosenkranz, Stephanie and Schmitz, Patrick W., Can Coasean Bargaining Justify Pigouvian Taxation?. Economica, Vol. 74, No. 296, pp. 573-585, November 2007. Available at SSRN: https://ssrn.com/abstract=1022696 or http://dx.doi.org/10.1111/j.1468-0335.2006.00556.x
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