I. Introduction, 361. —II. The model, 362. —III. Some solutions, 365.— IV. Role of international tax agreement, 368. — V. The strategic aspects of international investments, 370. — VI. Summary and conclusion, 374.

The Coase Theorem states that under certain ideal conditions resource allocation is unaffected by liability rules. This result, however, applies only in the absence of transaction or negotiation costs. Moreover, even though resource allocation remains unaffected, the income distribution between the parties is largely influenced by the liability rule. Take the celebrated example of a confectioner and a dentist. The final level of production activity after negotiation between the parties remains the same regardless of which party is liable. But the distribution of income between the confectioner and the dentist depends crucially on which party has the right to the environment. One of the characteristics of product liability is that producers and consumers are directly or indirectly associated through the price relationship. This very fact gives rise to a case where the conclusion of the Coase Theorem holds true even in the absence of explicit negotiations between the parties. Moreover, under certain conditions, the income distribution in terms of consumers' and producers' surplus could remain the same regardless of the liability rule. The purpose of this paper is to explore the implication of this price relationship on the product liability. In Section I, I shall analyze the case of product liability where the probability of damage is independent of the level of care taken by producers and consumers. It will be shown in a partial equilibrium framework that not onlv resource allocation but also income distribution in terms of consumers' and producers' surplus is unaffected by the liability rule, provided that consumers are fully informed of the intensity and the probability of the danger. In Section II, the assumption of the independence of the probability of damage from the care level is dropped. It will be shown that the game theoretic result obtained by John Brown' is still valid even if the quantity to be produced and consumed is a variable.

Applying the monetary approach to the balance of payments, this paper examines the interdependent nature of monetary policies. In an n-country game where each monetary authority decides on its credit expansion to maximize its objective function, it is shown that the Cournot (or noncooperative) solution and the Stackelberg leadership solution do not lie on the contract curve, unless the aggregated preference over the balance of payments is exactly matched by the creation of international reserves. If the creation of international reserves exceeds the aggregated preference, the monetary expansion takes on the nature of public bads, leading to international inflation.

Applying the monetary approach to the balance of payments, this paper examines the interdependent nature of monetary policies. In an n-country game where each monetary authority decides on its credit expansion to maximize its objective function, it is shown that the Cournot (or noncooperative) solution and the Stackelberg leadership solution do not lie on the contract curve, unless the aggregated preference over the balance of payments is exactly matched by the creation of international reserves. If the creation of international reserves exceeds the aggregated preference, the monetary expansion takes on the nature of public bads, leading to international inflation.

This paper studies the transmission of economic fluctuations under flexible and fixed exchange rates. In a model incorporating short-run and long-run Phillips curves, two channels of interdependence are studied: one through the balance of payments and the other through changes in the terms of trade and wage-price spirals. Under fixed rates both channels work; under flexible rates the second channel still works, although the first is blocked. While a recession in one country tends to be transmitted as a recession in the other under fixed rates, it tends to be transmitted as stagflation in the other under flexible rates.

This paper studies the transmission of economic fluctuations under flexible and fixed exchange rates. In a model incorporating short-run and long-run Phillips curves, two channels of interdependence are studied: one through the balance of payments and the other through changes in the terms of trade and wage-price spirals. Under fixed rates both channels work; under flexible rates the second channel still works, although the first is blocked. While a recession in one country tends to be transmitted as a recession in the other under fixed rates, it tends to be transmitted as stagflation in the other under flexible rates.