The Coase Theorem, so coined by George Stigler in 1966, based on Ronald H. Coase's oft-quoted 1960 article, “The Problem of Social Cost” has led to many different scholarly debates throughout the years. Its importance and validity has been argued, but it cannot be denied that it was a seminal article in the creation of the field of law and economics, as well as being one of the most quoted articles in economics. The Coase Theorem says, in brief, that allocation of resources will be Pareto-optimal no matter what the initial distribution of property rights, assuming no transaction costs (Fisher, 1981, Kolstad, 2000). Stigler (1966) himself stated it thus: “… under perfect competition private and social costs will be equal.” (p. 113). Today, this theorem is one of the essential ideas taught in environmental economics textbooks. There are many scholars debating the validity of the Coase Theorem, and although I find it fascinating how many different things people have taken out of this theorem and this article, I do not participate in this debate directly. Rather, I look at the Coase Theorem in regards to the idea of tradable emission rights. Specifically, I look at the scholarly process in the development of tradable emission rights, and my research question is: Did Coase's 1960 article “The Problem of Social Cost”, and the subsequent Coase Theorem lead to the development of tradable emission rights?
This thesis, then, has a definitive historical perspective, specifically within the branch of the history of economic thought. It also pays attention to scholarly processes in the field of economics since 1960. I first emphasize Coase's contribution to the field of environmental economics, before I focus my concentration on the development of tradable emissions rights, while tying Coase into this discussion.
My research question can of course be answered by a hearty but subjective 'yes!' The basis for this answer would be that Dales, when he wrote Pollution, property & prices was very inspired by Coase's article. I track this path from “The Problem of Social Cost” to today's idea of tradable permits. This includes some of the debates in the 1960s and 70s, as well as some comparisons between some noteworthy economists such as Coase, Mishan, and Dales. I also include some mention of what Montgomery, Tietenberg, Hahn and Stavins got out of Dales' ideas. I have chosen Montgomery because he is so often cited for his 1972 article, Tietenberg because he has written the authoritative textbook on the subject of emissions trading, and Hahn and Stavins because they have both written many articles over the last few decades that have to do with emissions permits. Lastly I consider some of Adam Rose's work, as he claims the Coase Theorem as the precursor to the idea of marketable permits.
In an attempt to find and analyze the scholarly path from Coase's 1960 article “The Problem of Social Cost” to the idea of tradable permits, I analyze a series of works and their connection to each other. This thesis can thus be seen as a non-traditional literature review, in that I survey the literature in the field on this topic, but only along this path that I have designated. I show that the ideas contained in Dales' essay Pollution property & prices are reminiscent of and can be said to be taken from Coase's article. I discuss why Dales' essay should be seen as the tipping point work, the work that made the idea of tradable emission rights seem like a viable option. After that, I acknowledge and discuss the importance of Montgomery's 1972 article “Markets in licenses and efficient pollution control programs”, and I show how it is cited consistently as the work that rigorously proved the efficiency of marketable permits. I further look at some prominent scholars within the field, to see where they align with Coase's, Dales' and Montgomery's work, and to see how they have moved the idea of tradable permits forward.
This idea of marketable permits seems to have gone full-circle, beginning with Dales as a product of Political Economy, jumping through the hoops to prove itself as a worthy economic concept with Montgomery's highly theoretical, rigorous proof of its least-cost efficiency, and finally ending up again among the policy-minded and political economists of Hahn's and Stavin's caliber.
How scholars build on each other's work is worthy of investigation. The wealth of information and research available to us is simply staggering, and to be able to not lose track of it all is a valuable exercise. The field of economics seems to be in need of more retrospection, and it is thus valuable to take a meta-view of the mass of research work available. If we as scholars are all building on each others' work, what happens when we're building inaccurately, or at least not as the scholar you just quoted intended? In the case of Coase, it seems he has been misquoted through his whole career, but nevertheless, good research has come out of it.
This thesis also highlights the difference between theory and practice, and how crucial it is to distinguish between the two. The theory of marketable permits is only important insofar as it can be successfully implemented. As a theory it only has validity as an academic exercise. Many authors investigated in this thesis have wrestled with the difference between theory and practice (notably, Hahn and Stavins), and through their work, we can see that one should be careful to assume that what works in theory will work in practice.
Thus, bridging the gap between theory and practice is important. Dales' opinion that “…lawyers, economists, and students of public administration...” should work together to solve this issue (1968a, p. 105), is as true today as it was in 1968, and the increased cooperation and work within cross sections of these and the fields of natural science is the evidence that, at least in academia, interdisciplinarity is becoming widespread.