Uncertain externalities, liability rules, and resource allocation
Abstract
The authors extend the ''Coase Theorem'' by analyzing the effects of one firm's activities on another firm in cases of uncertain externality, legal liability, and resource allocation. A mathematical model is used to examine, in terms of risk acceptance and profit maximizing, a merger of two firms and the ensuing bargaining over one firm's pollution output. This costless bargaining is generally accepted as determining the socially optimal level of resource allocation and is independent of liability assignment. However, the authors conclude that liability rules in an uncertain world can determine resource allocation as much as bargaining skills. Government intervention in the form of tax and subsidy incentives can intervene in favor of increased output. 14 references.
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