Policy Instrument Choice with Coasean Provision of Public Goods

We examine the interplay between environmental policy instrument choice (i.e., prices vs. quantities) and private provision of public goods, which in this context we denote “Coasean provision.” Coasean provision captures private provision of environmental public goods due to consumer preferences for environmentally friendly goods and services, incentives for corporate environmental management, environmental philanthropy, and even overlapping jurisdictions of policy. We show theoretically that even in a world of perfect certainty, the presence of Coasean provision distinctly affects instrument choice based on the efficiency criterion. We generalize the analysis to account for uncertainty using the classic Weitzman framework, showing that Coasean provision results in a favoring of prices over quantities with uncertainty over either the marginal benefits or costs of pollution. Our findings suggest that the increasing prevalence of Coasean provision motivates a need in many settings to rethink the design of effective and efficient environmental policy instruments.