Question

Suppose a pulp and paper mill emits pollution into a river upstream of a commercial fishing operation. The emissions from the mill damage the fishery by reducing the number of fish that can be caught. The mill benefits from emissions as these are a by-product of pulp and paper production.

Briefly explain why the arguments of Ronald Coase might be relevant in this situation

Answer 1

The arguments of Ronald Coase become relevant because he had explained how transaction costs which prevent bargaining as well as poorly defined property rights prevent a Pareto efficient outcome. In this case also it can be seen that there are significant transaction costs involved in identifying who is emitting pollution into the river. Also, as there are no well defined property rights for the stream. This means that coming to a pareto efficient outcome would be difficult. Coase has identified situations on how cases like these can be dealt with.