Coasean versus Pigovian solutions to the problem of social cost: the role of common entitlements

This paper works towards drawing a proper relationship between the Coasean and Pigovian approaches that should be based on the distinction between individual/private and shared/common entitlements. Because of the specific goals of his work, Coase (1960) does not make an explicit distinction between the two types of property rights; however, there are basic differences in their management, so this distinction is essential. According to Coase, the definition of property rights facilitates the optimal allocation of private entitlements through Coasean bargaining and market transactions. This paper suggests that shared/common entitlements should also be taken into account. The shared/common entitlements alternative is so important that it should be explicitly outlined in Coase’s entitlement optimisation assumption. When resources are shared among members of groups and communities, Coasean bargaining and market deals may be carried out only after co-owners organize and collective management is established in order to negotiate the reallocation of entitlements. For Coasean bargaining to take place in these situations, centralized (i.e. Pigovian) rules and regulations should first be adopted by the groups/communities. Hence, in cases of common property rights, the Coasean and Pigovian approaches are complementary to one another. In such cases, Coasean bargaining is not a rejection of centralized Pigovian regulation but is a means to its improvement. And vice versa: relevant Pigovian rules adopted by the co-owners of entitlements are necessary institutional arrangements enabling Coasean market solutions.