The detailed theorem of this topic could be attached to the Coase Theorem
Use the thinking method like one unit method. For example, is the of one additional unit lager than the of one additional unit?
So if the , the social efficiency could not happen. If we force the trade to happen, it would lead to a Social Loss
If there is no Transaction Cost, we could reach to the efficiency by private bargaining
It is important to figure out under the Bargaining, which one is the seller (so he would have the ), and which one would be the buyer, so he would have the . And we should compare to check out whether the trade would happen.
However, some cases don’t involve the simple fence case. For example, if the pollution could be avoided by building a fence (2 parties could maximize their own profit, you only need to pay the price of the fence), now who needs to pay for the fence is the problem.
The situation should be divided as a
- Can we bargain?
- Who has the rights?
Now we know the efficient outcomes could come from the Coase Bargaining, but how are the terms in an agreement decided? Now introduce the Nash Bargaining