Abstract:

Most of the debate about Coasian bargaining in the presence of externalities relates to the First Welfare Theorem: is the outcome under bargaining efficient? This debate has involved the definition and importance of transaction costs, the significance of private information, and the effect of entry. There has been little analysis of how Coasian bargaining relates to the Second Welfare Theorem: even if the bargaining outcome is efficient, does the process limit the set of Pareto optimal allocations which can be achieved? We consider a model in which individuals utilize a common resource and may affect each other's output. The individuals differ in their productivities or tastes and this information is private to each of them. The government can manage the common resource and use nonlinear taxes to correct for the externality or it can turn the common resource over to a private owner who can charge individuals to utilize it with a nonlinear fee schedule. The government and the owner hav

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