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PRODUCTION EXTERNALITIES AND LONG‐RUN EQUILIBRIA: BARGAINING AND PIGOVIAN TAXATION
Author(s) -
HAMILTON JONATHAN H.,
SHESHINSKI EYTAN,
SLUTSKY STEVEN M.
Publication year - 1989
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1989.tb02015.x
Subject(s) - economics , microeconomics , externality , coase theorem , context (archaeology) , production (economics) , paleontology , transaction cost , biology
This paper analyzes bargaining and Pigovian taxation solutions to inefficiencies from production externalities with free entry. The Coase Theorem fails in a decentralized context but remains valid if the property rights holder can act like a command economy planner. A less powerful price‐taking rights holder's objective function is nonconcave, causing an inefficient bargaining outcome. Bargaining complicates Pigovian taxes with a nonlinear tax scheme required to sustain the optimum. Polluting firms pay a franchise tax whose revenue is given lump sum to consumers and face a marginal charge only on excess output, which thus raises no revenue in equilibrium.