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Friday, July 4, 2008

Solving the commons problem by legislative fiat?

At, Eric Husman writes:
EH) By assigning property rights in an application of the Coase theorem via legislative fiat, the commons problem is removed. Pigovian taxes are strictly ruled out by this (see David Friedman, Law's Order, on problems with joining Coase and Pigou), but some minor regulation may still be beneficial. For example, cap & trade markets in sulfur & carbon are generally accepted as the proper way to address the commons problem that results in pollution.

In this respect, I am not averse to public solutions so long as it can be shown that they are better than any possible private solution. That being a nearly impossible task (because of the "any possible" requirement on something as dynamic as our sophisticated economy), I would rather see state action that attempts to align incentives and allow the market to work without dictating the outcome; well-designed cap & trade markets are preferred to Pigovian taxes which are preferred to command & control regulations, so give me the sulfur market over a carbon tax over a new CAFE rule. (EH
Hmm, my understanding is that Fred Foldvary prefers Pigovian taxes over cap-and-trade.  I'll have to read Law's Order and see if it explains how legislative fiat" can transform non-excludable resources into excludable ones.