Property Right Approach and Emissions Trading Schemes

The economist R. Coase observed that environmental problems can be resolved through bargaining between the affected parties as long as property rights, or rights to own or use the environment, were established. He also recognized that in many cases, transaction costs make bargaining difficult. This chapter first explains the Coase Theorem, property rights, and issues of transaction costs. We then extend the discussion by examining emissions trading, a policy instrument inspired by Coase’s insight. We provide an economic explanation that demonstrates how the trading of pollution permits works as an efficient market-based instrument for reducing emissions.