Coasian Solutions to the Externality Problem in Experimental Markets

The experimental demonstration by Plott (1983) that a behavioral externality problem exists in double-oral auction markets is replicated in 6 experiments. In addition, it is demonstrated that a Coasian approach to the externality problem produces solutions, after an initial learning period, that are...

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Bibliographic Details
Published in:The Economic journal (London) 1987-06, Vol.97 (386), p.388-402
Main Authors: Harrison, Glenn W., Hoffman, Elizabeth, Rutström, E. E., Spitzer, Matthew L.
Format: Article
Language:English
Subjects:
Behavior
Coase theorem
Contracts
Economic externalities
Economic theory
Efficiency
Efficiency metrics
Experiment design
Experiments
External economies
Implications
Market
Market economies
Natural environments
Predictions
Private costs
Social costs
Surplus
Tax policy
Trading
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Summary:The experimental demonstration by Plott (1983) that a behavioral externality problem exists in double-oral auction markets is replicated in 6 experiments. In addition, it is demonstrated that a Coasian approach to the externality problem produces solutions, after an initial learning period, that are efficient and informationally decentralized. The efficiency of the observed Coasian solutions, like that of the optimal informationally centralized methods, is very high. One major disadvantage of the Coasian process as compared with Plott's policy instruments is the variation in the efficiency results of the former. The tax policy and license policy results are much more stable, with efficiency steadily rising toward 100%. It might be argued that stability of outcomes is more important than the high average efficiency accompanied by occasional extreme variations observed in the Coasian experiments.
ISSN:0013-0133
1468-0297
1468-0297
DOI:10.2307/2232885