1-INTRODUCTION
Since Adam Smith, we assume that rational individuals try to maximize their utilities or benefits in a competitive market and by this markets ends in an equilibrium point or Pareto optimum on which it is impossible to rearrange resources and make everyone better off. So in order to reach full efficiency we need an organized and perfectly competitive market and optimum prices.
As we all know real world is not perfect and in economics, factors called externalities causes imperfectness of markets. We can also name this as “market failure.” Basically actions of economic parties affecting other actors or society and imposing a cost on them are called negative externality. The unwanted cost that they generate is where problems arise. “The crucial feature of externalities is that there are goods people care about that are not sold on markets...It is the lack of markets for externalities that causes problems”(Varian,H.R.2006) They make our economic models imperfect because it is almost impossible to take every aspect of every economic actor into account. Thus negative externalities always considered as an excuse for government intervention to the markets. Government intervention brings about public solutions such as Pigouvian Tax, Subsidizing, Quotas, and Regulations and so on. Besides we can assert different ways of private solution to externality problems such as; internalizing the externalities, compensation by common-law or assigning property rights. The Coase Theorem, as a bargaining game model, is a response to centralized solutions. In our case here we will discuss the effectiveness of the Coase Theorem as a way of achieving efficient pollution abatement.
