An Application of Coase Theorem on the Social Cost of Pollution

This project explores methods of reducing the social cost of air pollution by examining the transaction costs between communities and firms, and reaches a Pareto efficient solution, a solution that allows neither side to have additional gains without harming the other. An efficient solution could entail individual, organizational, and governmental efforts. According to Coase, clearly defined private property rights, regardless of whom they favor, will lead to a Pareto efficient solution in a world of zero transaction costs. Since we live in a world with very real non-zero transaction costs such as communication costs, awareness costs, negotiation costs, and standing legislation costs, a most efficient solution is then the solution that minimizes these costs. In addition to minimizing transaction costs, unseen costs of the right establishment must be recognized such as wealth and market entry impacts, psychological costs, and future innovation incentives. These secondary costs will influence to whom we decide to assign certain property rights. Through the examination of cases a method in which to approach the social cost of air pollution is developed, and by extension other forms of pollution, that leaves society with the most desirable outcome possible