Solutions to Market Failure The regulatory solution and what is wrong with it It requires information some of which the regulator does not have And incentives to produce an efficient outcome,which the regulator does not have The Pigouvian solution and what is wrong with it(pre Coase) Controlling the externality requires information the firm does have,but... Knowing how much it should be controlled still requires information from whoever sets the tax And an incentive to try to set it at the efficient level ·The Coasian critique Nothing works,since costs are produced by both parties Everything works,since parties can transact to the efficient outcome The problem is transaction costs Solutions to Market Failure • The regulatory solution and what is wrong with it • It requires information some of which the regulator does not have • And incentives to produce an efficient outcome, which the regulator does not have • The Pigouvian solution and what is wrong with it (pre Coase) • Controlling the externality requires information the firm does have, but … • Knowing how much it should be controlled still requires information from whoever sets the tax • And an incentive to try to set it at the efficient level • The Coasian critique • Nothing works, since costs are produced by both parties • Everything works, since parties can transact to the efficient outcome • The problem is transaction costs