Armchairers,
I have been having a running argument with someone about externalities.
My argument was that, even if Coasian bargaining were to take place, the
externality doesn't go away - it still exists [in the sense that one
person's action directly enters the utility function of the other person]
- but that it's just no longer Pareto-relevant.
The other person has been arguing that, once Coasian bargaining has taken
place, the externality *no longer exists*.
My understanding was that this is what Buchanan and Stubblebine's
(Economica, 1962) classic paper on the subject was all about. My
recollection of part
of that paper was that (paraphrasing), sure, there
might be a lot of externalities everywhere, but most are Pareto
irrelevant, in the
sense that, even with low transactions costs, perfect information etc etc
(ie Coase's conditions), in a lot of cases all of the opportunities for
mutually beneficial exchange have been exhausted.
By applying the Coase theorem to this situation, we can then infer that,
since there are no gains to made from bargaining, the parties
must *already* be at the efficient point, and therefore the externality,
even though it still exists in a very real sense, is simply of no concern
to the welfare economist.
Is this right or am I missing something?
Alex Robson
UC Irvine
