Ian A. MacKenzie, and Markus Ohndorf,  School of Economics Discussion Paper No. 515 May 2014, School of Economics, The University of Queensland, and Institute for Environmental Decisions, ETH Zürich.

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Coasean arguments against the Pigouvian perspective are well established. A central tenet in this criticism argues that a Pigouvian tax may be a source of inefficiency: if par- ties were to bargain in the presence of a Pigouvian tax, (allocative) inefficiencies would occur—the so-called Buchanan-Stubblebine-Turvey Theorem. By analyzing a Coasean environment where the appropriation of property rights is costly, we show—in contrast to the Buchanan-Stubblebine-Turvey Theorem—that Coasean bargaining in the presence of a pre-existing (Pigouvian) tax is Pareto improving. This has implications for policy where dual regulatory environments exist, such as regulation at the state and federal level, as well as environmental liability and litigation.