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Pareto Efficiency, the Coase Theorem, and Externalities: A Critical View

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  • Andrea Ventura
  • Carlo Cafiero
  • Marcello Montibeller

Abstract

We offer a critical review of the Paretian definition of efficiency by noting its correspondence with the description of the logic underpinning market relationships. With reference to Ludwig Wittgenstein’s analysis of the value content of tautologies, we discuss the tautological nature of the propositions regarding the efficiency of exchange and market equilibria when there are externalities. We critically review the debate on the Coase theorem, its treatment of externalities, and the contrast with the Pigouvian approach, taking into account the distinction between propositions that are true based on their formal logical structure and propositions that are true with respect to their correspondence to actual states of affairs. We also reveal and discuss the logical inconsistencies — in particular, the one between the Coase theorem and perfect competition — and the practical consequences of the application of Pareto efficiency to the analysis of externalities.

Suggested Citation

  • Andrea Ventura & Carlo Cafiero & Marcello Montibeller, 2016. "Pareto Efficiency, the Coase Theorem, and Externalities: A Critical View," Journal of Economic Issues, Taylor & Francis Journals, vol. 50(3), pages 872-895, July.
    • Handle: RePEc:mes:jeciss:v:50:y:2016:i:3:p:872-895
    DOI: 10.1080/00213624.2016.1213595
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    Cited by:

    1. Meramveliotakis, Giorgos, 2023. "Reciprocity principle and private property rights in land: Coasean world is neither neoclassical nor capitalist," Land Use Policy, Elsevier, vol. 135(C).

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