Criticisms of Coase Theorem: Can Ethical Strength of the Parties Ensure Efficient Resource Allocation?
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Date
2016-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Centre for Research on Islamic Management and Business
Abstract
Ronald Harry Coase (1910–2013), a British economist and author in his
famous Coase Theorem states, „As long as private property rights are well
defined under zero transaction cost, exchange will eliminate divergence and
lead to efficient use of resources or highest valued use of resources.‟ The
theorem has greater implications to internalize the externalities through
market mechanism. However, the theorem has been criticized by
environmental economists since the fundamental flaws of the theorem lie
under the invalidity of its assumptions in the reality. Specially, in the presence
of environmental externality, the assumptions of the theorem are not valid.
This paper focuses on the role of parties in transaction where environmental
externality exists, from the perspective of Islamic ethics. The paper argues, in
the presence of negative externality where the assumptions of Coase Theorem
are not applicable, the internalization of externality can still be possible
without any government intervention. Such internalization is related to the
ethical strengths of the parties involved in the environmental pollution. The
paper further argues, the efficiency of resource utilization is positively related
with the ethical strength of the parties in the market.
Description
Keywords
Coase Theorem, Ethical Strength, Efficient Resource Allocation, Internalization of Externality,, Environmental Pollution
Citation
Vol.4, No. 1, June 2016