What are the weaknesses of 'coase theorem'?

(i) The Coase theorem assumes zero translation cost. If translation costs are high then the outcome of bargaining over weights won‘t be pareto efficient. Also the outcome will
be affected if there is assignment of translation costs between the two parties in the
bargain. Pigon (1932) points correctly to the cost in terms of time and efforts required for
bargaining. In the presence of very large lump sum translation costs which exceeds
the benefits from negotiation a discrete decision either allowing or barring the activity
maybe the solution.
(ii) Another problem is that voluntary bargaining may not proceed if large number of
people is involved. For example if pollution problem is experienced by large numbers
of individual then each individual may prefer to sit quietly and hope that others will
offer enough compensation to induce a less polluted atmosphere. In this way each
victim would seek to free ride. Clearly if all affected people behave in this way the
process of negotiation will not materialize. Coase solution will only be applicable in those situations in which properly rights and hence contracts can be well specified at reasonable cost and where problems of free riding do not arise.
(iii) It is not necessarily the case that negotiation will produce a pareto improvement if both parties do not have access to all available information‘s. As David and Kamien
(1971) has pointed out one side may have more or superior information than the other
and this may lead to cheating or black mailing.
(iv) The Coase solution has distributional consequences. The individual consuming the
external effects compensate the polluter to reduce level of pollution whilst solutions to
externality problems might not be desirable in distribution terms. For example
consumer of those goods that carry a pollution tax will end up paying higher prices
and some employees who work in those firms may be made redundant as output
levels reduce.
v) Mergers:
Another possible solution to the problem of externalities may be for the parties involved to
merge. For example if a fishing companies profits are being harmed by the pollution
produced by a steel mill then the problem of this externality can be solved by merging the
parties involved and internalizing the effects. "For instance, if the steel manufacturer
purchased the fishery, he would willingly produce less steel than before, because at the
margin doing so would increase the profits of the fishing subsidiary more than it decreased
the profits from his steel industry. This suggestion too however may be seen as having a
number of problems in its practical implantation.

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NatalieR answered the question on June 21, 2022 at 09:19