The Identity of the Generator in the Problem of Social Cost

35 Pages Posted: 6 Oct 2005

See all articles by Rohan Pitchford

Rohan Pitchford

University of Sydney Business School

Christopher M. Snyder

Dartmouth College - Department of Economics

Date Written: September 2006

Abstract

One of Coase's central insights is that distinguishing between the generator and recipient of an externality is of limited value because externality problems are reciprocal. We reconsider the relevance of the identity of the generator in a model with non-contractible investment ex ante but frictionless bargaining over the externality ex post. In this framework, a party may distort its investment to worsen the other's threat point in bargaining. We demonstrate that the presence of this distortion depends, among other factors, on whether the investing party is a generator. Social efficiency can sometimes be improved by conditioning property rights on the identity of the generator: for example, assigning damage rights if the rights holder is a generator and injunction rights if the rights holder is a recipient can be more efficient than either unconditional damage or injunction rights.

Keywords: externality, polluter, transactions cost, reciprocal harm

JEL Classification: K11, D23, C78, H23

Suggested Citation

Pitchford, Rohan and Snyder, Christopher M., The Identity of the Generator in the Problem of Social Cost (September 2006). Available at SSRN: https://ssrn.com/abstract=809986 or http://dx.doi.org/10.2139/ssrn.809986

Rohan Pitchford

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Christopher M. Snyder (Contact Author)

Dartmouth College - Department of Economics ( email )

301 Rockefeller Hall
Hanover, NH 03755
United States
(603) 646-0642 (Phone)
(603) 646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~csnyder/

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