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Coase Theorem


An alternative to pollution taxes and government regulation is for the polluters and those affected to come to a bargaining solution where the latter are compensated.

Ronald Coase, from the University of Chicago, was the first to see that if property rights are fully assigned and if people can negotiate at low cost with one another they will arrive at efficient solutions to problems caused by externalities without the need for explicit government intervention in the form of regulation and/or taxation.

This insight is called the Coase Theorem, and on the strength of it Coase was awarded the Nobel Prize in Economics in 1991.




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