Exploiting the Coase Mechanism: The Extortion Problem

by Ekkehart Schlicht 

Kyklos 49, 1996, 319-330

Abstract

Consider the project of building a smoke-emitting factory in a residential district. Private profits exceed investment outlays, which are sunk. As the factory owner has the right to pollute, the project is privately profitable, but external damages created by the project are so large that it is socially inefficient. Coase bargaining would enable any entrepreneur to earn a profit by proposing such a project without any intention to carry it out. As similar bargaining and outcomes could occur for each available residential plot, the sum total of the necessary side-payments may exceed the aggregate value of the site, and residential use may be blocked right away. This outcome could be avoided by another allocation of rights. The allocation of pollution rights thus matters.

Keywords:   Coase theorem, externalities, bargaining, zoning, regulation, welfare

JEL classification:  D62, D61, K23, K32

Professor Dr. Ekkehart Schlicht: Veröffentlichungen/Publications
 

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