It is a similar concept to Pigou Theorem. But it mostly focus on the market side (while Pigou) is on the government side.
It’s about a theory that, the market could adjust themselves. That means, if 2 firms in the Market would realize the existence of the Externality, and they have abilities to bargain freely, then it would lead to the result which both firms maybe satisfied. And this is called the Coase Theorem
The Coase Theorem should consider in 2 sides, for example if the problem is between firm A and firm B about the “river problem” (the one discussed in class, A is nearby the upstream of a river produces chemical product, while B is under it and suffered from it) , then we have to discuss in 2 sides.
If Firm B is the owner of the river…
Remind that firm B is under the river, so that firm A should pay firm B in order to produce, once it meets the (willingness to accept), the firm B would accept the A’s production
How to calculate ?
Note that the (Social Marginal Cost - Marginal Cost). Because only if others pay you the difference value you will accept the advice.
Then we can come to this figure…
The Trade Balance
So, after evaluating the relationship, we could come to the balance between A and B
Here, the firm A is more like a buyer, because he needs the firm B to allow him to pollute, and firm B is the supplier, he will choose whether to “sell”
If Firm A is the owner of the river…
Now, if firm A is the owner, then it would be for firm B to bargain A to pollute less. ( Because , if firm B doesn’t exists, firm A could pollute as large as it wants)
Now, 攻守之势异也. Firm A act as a seller, while firm B is the buyer. So that’s the reason why professor Sun would change inverse the quantity curve because the meaning behind it is the change of the “seller-buyer” relationship.
Conclusion
The conclusion is that no matter the owner of the river is who, once there is no Transaction Cost, the market solution would come the the Social Optimum () and this is the brief insight of the Coase Theorem
The role of the Transaction Cost
Notice that the Coase Theorem is under an assumption that they have no cost on the transaction. If the cost of this is too high, the deal maybe not appear, see Externalities with High Transaction Cost
In the topics of ECON4008 Law and Economics
Core information : and
Reference
https://zhuanlan.zhihu.com/p/105323135
2023-4 Sect 3-1 Appd on Pigou tax — Analysis Example
2023-4 Sect 3-1 Appd on Coase theorem