Can Coasean Bargaining Justify Pigouvian Taxation?

20 Pages Posted: 31 Mar 2004

See all articles by Stephanie Rosenkranz

Stephanie Rosenkranz

Utrecht University - School of Economics

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2004

Abstract

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. We show that the hold-up problem, which occurs if non-verifiable investments have external effects and parties cannot be prevented from always trying to exploit all gains from trade, may in fact be solved by taxation. Thus, in our framework Coasean bargaining is not a substitute for Pigouvian taxation; instead it is the very reason for government intervention.

Keywords: Hold-up problems, bargaining, contracts, taxation, externalities

JEL Classification: D62, H21, H23, L14

Suggested Citation

Rosenkranz, Stephanie and Schmitz, Patrick W., Can Coasean Bargaining Justify Pigouvian Taxation? (February 2004). CEPR Discussion Paper No. 4263. Available at SSRN: https://ssrn.com/abstract=510302

Stephanie Rosenkranz (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands
+31 30 253 9806 (Phone)
+31 30 253 7373 (Fax)

HOME PAGE: http://www.uu.nl/uupublish/defaculteit/persoonlijkepagi/rosenkranz/

Patrick W. Schmitz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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