Externality, Pigou and Coase: A Case for Bilateral Taxation and Amenity Rights

While Coase correctly emphasizes the reciprocal nature of an externality, he ignores an important asymmetry. At the initial private equilibrium, the incremental harm on the sufferers of the external cost is significant while the harm on the causers of marginally reducing the damage-causing activity is infinitesimal. This makes a Pigovian tax efficient, ignoring administrative costs. A bilateral tax may be superior as it not only makes the sufferers take account of the costs imposed on the causers in having to reduce the relevant activity, but also ensures that the sufferer has no incentives to exaggerate or understate the true damages. The case for amenity rights is further supported on the following grounds: l. the Coase theorem is invalid in the presence of conscience effects; 2. effects on future decisions; and 3. the under-provision of environmental quality due to its global public-good and long-term nature and the relative unimportance, at least in rich countries, of additional material consumption in comparison to environmental quality