| Abstract: | Many authors have held that in a world with reasonable positive transactions costs, the assignment of liability for pollution damages affects profits, thus long run equilibrium. Therefore, the Coase Theorem fails for such cases. Others have defended the Theorem in such situations .
This paper shows that the disagreement has its roots in a confusion of liability rules and property rights. A simple general equilibrium model is used to show that the Theorem is correct for property rights assignments, but not for liability rules. Liability rules are shown to be, in effect, incomplete property rights, which leads to inefficiency . |
