The social cost problem, rights, and the (non)empty core

Abstract

We revisit the “Coase theorem” through the lens of a cooperative game model which takes into account the assignment of rights among agents involved in a problem of social cost. We consider the case where one polluter interacts with many potential victims. Given an assignment or a mapping of rights, we represent a social cost problem by a cooperative game. A solution consists in a payoff vector. We introduce three properties for a mapping of rights. First, core compatibility indicates that the core of the associated cooperative games is nonempty. Second, Kaldor-Hicks core compatibility indicates that there is a payoff vector in the core where victims are fully compensated for the damage once the negotiations are completed. Third, no veto power for a victim says that no victim has the power to veto an agreement signed by the rest of the society. We then demonstrate two main results. First, core compatibility is satisfied if and only if the rights are assigned either to the polluter or to the entire set of victims. Second, there is no mapping of rights satisfying Kaldor-Hicks core compatibility and no veto power for a victim.