NBER WORKING PAPER SERIES

WILLIAMSON AND COASE:

TRANSACTION COSTS OR RENT-SEEKING IN THE FORMATION OF INSTITUTIONS

Gary D. Libecap

Working Paper 32603

http://www.nber.org/papers/w32603

NATIONAL BUREAU OF ECONOMIC RESEARCH

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June 2024

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Williamson and Coase: Transaction Costs or Rent-Seeking in the Formation of Institutions
Gary D. Libecap
NBER Working Paper No. 32603
June 2024
JEL No. K11,K32,N42,N5,N52,N92,Q52,Q53,Q57,Q58

ABSTRACT

The governance and transaction cost insights of Oliver Williamson (1975, 1985, 1996, 2010) and
Ronald Coase (1937, 1992) have framed antitrust polices and firm management strategies.
Transaction cost economics explain efficient governance adaptation. With a focus on private
efficiency gains within firms and markets, however, neither Williamson nor Coase explore
political exchange and rent-seeking. Coase (1960) sought to reform Pigouvian externality
regulation based on transaction cost efficiencies. He called for assignment of property rights and
bargaining, and for institutional comparisons of costs and benefits to reveal relative transaction
cost and welfare advantages. His 1960 paper is among the most cited in economics, but his
remedies have not been adopted as the primary approach in major US environmental policies. All
US environmental and natural resource laws since 1970 are Pigouvian. Limited Coasean
bargaining occurs late and around the edges of the laws. The efficiency advantages, welfare
gains, and collaborative responses Coase suggested have not been achieved. The Magnuson-
Stevens Fishery Act of 1976, enacted 16 years after Coase, used Pigouvian fishery regulation for
25 years, and upon failure, was replaced by abbreviated property rights and trade. Fishery
economic values were lowered relative to what might have been possible. The Endangered
Species Act of 1973 rejected previous Coasean legislation authorizing purchase of critical habitat
and instead opted for uncompensated Pigouvian controls on private landowners, who held most
endangered species. Landowners resisted, and only 3% of listed endangered species have
recovered. There is no evidence of a weighing of comparative transaction costs between Coase or
Pigou in enacting any legislation. Rent-seeking via political bargaining among interest groups,
politicians, and agency officials explains many of the observed patterns in externality regulation.
The analysis suggests that transaction cost economics play a lesser role in the political arena.

Gary D. Libecap
Distinguished Professor,
Bren School of Environmental Science and Management
Distinguished Professor of Economics
University of California, Santa Barbara (Emeritus)
400 Daly Avenue
Missoula, Montana 59801
and NBER
[email protected]
 I. Introduction: The Differential Effects of Transaction Costs and Rent-Seeking:
Williamson and Coase.
Efficient transaction costs adjustments are the bases for Coase’s (1937, 1992) and
Williamson’s (1975, 1985, 1996, 2010) explanations for firm boundaries, governance,
hierarchies, and contracts.2 Their critical insights influence understanding of firm structure, size,
and strategy; management, boards of directors, and team production; specific, non-deployable
capital and information impactedness; as well as markets and anti-trust. Because transaction
costs constrain potentially-profitable exchange, agents economize with various institutional
innovations, such as vertical integration, relational contracts, and partitioning production within
and outside firms.3 Scholarship, anti-trust policies, and the auctioning of the spectrum have all
been affected.4

2
Coase, R.H. (1937). The Nature of the Firm. Economica 4(16): 386-405; (1992) The Institutional Structure of
Production, University of Chicago Law School, Occasional Paper 28. Williamson, O.E. (1975) Markets and
Hierarchies: Analysis and Antitrust Implications; (1985) The Economic Institutions of Capitalism: Firms, Markets,
Relational Contracting; (1996) The Mechanisms of Governance; and (2010) Transaction Cost Economics: The
Natural Progression, American Economic Review 100: 673-690.
3
Definitions of transaction costs are provided in Demsetz, H. (1968). The Cost of Transacting. The Quarterly
Journal of Economics, 82 (1) 33-53; Barzel, Y. (1982), Measurement Cost and the Organization of Markets. The
Journal of Law and Economics, 25 (1): 27-48; (1989). Economic Analysis of Property Rights; and Allen, D. W.
(2000). Transaction Costs. Encyclopedia of Law and Economics, Volume I: The History and Methodology of Law
and Economics.
4
The literature is enormous. See for example, Williamson (1991). Comparative Economic Organization: The
Analysis of Discrete Structural Alternatives, Administrative Science Quarterly 36 (2): 269-296; Blair, M.M. and
Stout, L.A. (1999) A Team Production Theory of Corporate Law Virginia Law Review, 85 (2): 247-328; Armour,
H.O. and Teece, D.J. (1978). Organizational Structure and Economic Performance: A Test of the Multidivisional
Hypothesis. The Bell Journal of Economics 9 (1): 106-122; Teece, D.J. (1981). Internal Organization and Economic
Performance: An Empirical Analysis of the Profitability of Principal Firms, Journal of Industrial Economics, 30 (2):
173- 199; Williamson, O.E. (1988). Corporate Finance and Corporate Governance. Journal of Finance, 43 (3): 567-
591; Masten, S. (1984). The Organization of Production: Evidence from the Aerospace Industry. Journal of Law and
Economics 27 (2): 403-417; de Figueiredo, J.M. and Teece, D.J. (1996). Mitigating Procurement Hazards in the
Context of Innovation. Industrial and Corporate Change, 5 (2): 537-559. Spiller, P. T. (2009). An Institutional
Theory of Public Contracts: Regulatory Implications, in Menard, C. and Ghertman M., (2009). Regulation,
Deregulation, Reregulation – Institutional Perspectives :45-66, and Argyres, N., Mahoney, J. and Nickerson, J.
(2019). Comparative Adjustment Costs and Strategic Responses to Shocks, Strategic Management Journal, 40, 3
(2019): 357-376; Tirole, J. (1986). Hierarchies and Bureaucracies: On the Role of Collusion in Organizations,
Journal of Law, Economics, and Organization 2(2): 181-214. Ménard, C. and Shirley, M. M. (2005, 2008)
Handbook of New Institutional Economics; (2022) Advanced Introduction to New Institutional Economics.
For the spectrum, see Coase, R.H. (2013). The Federal Communications Commission. The Journal of Law and
Economics, 56 (4): 879-915.

2
 Coase’s other stream of analysis in The Problem of Social Cost (1960) has not fared so
well. The article is among the most cited in economics and has stimulated extensive academic
discussion (Medema 2020). Even so, Coase’s policy recommendations to address externalities
via the assignment of property rights and negotiation are not the primary regulatory mechanisms
in any US environmental and natural resource legislation enacted since 1970. 5 While there has
been plenty of time for his arguments to be incorporated in policy, that has not happened, Pigou
generally has remained supreme. Efficiency and transaction costs do not explain the absence.
Indeed, economizing on transaction costs plays little or no role in underlying policies.
The US legislation, described as Pigouvian, does not rely upon taxes, but prescribes
emission, discharge, or production standards without compensation. While theoretically aimed
at equating marginal private and social costs, lobby benefits and political returns appear
paramount in legislative histories, and costs are not critical. Indeed, in some cases, cost
considerations are prohibited. Cost/benefit analysis, implicit in Coasean exchange, is not
inherent in the policies. Broad net welfare benefits are ambiguous.
For example, the Clean Air Act of 1970 and its amendments generally are asserted to pass
any ex-post cost/benefit assessment. The regulatory process, however, provides no effective
instruments for determining ex-ante efficient air quality levels.6 Air pollution targets or quality
standards are set, based on epidemiological estimates, with associated costs playing a secondary
role. There is no analysis of incremental benefits from gradual air quality adjustments relative to
corresponding additional costs. As Coase warned, the absence of marginal cost/benefit
comparisons could lead Pigouvian restrictions to be too broad, too restrictive, and on net, too
costly.
Coasean bargaining is observed in smaller-scale, local settings (Ellickson 1991). 7 There
are pecuniary benefits to agents in negotiating agreements to avoid neighbor trespass,
compliance with home owners’ association rules, securing environmental easements, or the

5
Medema, S.G. (2020). The Coase Theorem at Sixty. The Journal of Economic Literature. 5 8 ( 4 ) : 1045-1128.
6
Aldy, J E, Auffhammer, M. and Cropper, M. (2022), Looking back at 50 years of the Clean Air Act, Journal of
Economic Literature 60(1): 179-232.
7
Ellickson, R.C. (1991) Order Without Law: How Neighbors Settle Disputes, Harvard University Press; (2016).
When Civil Society Uses an Iron Fist: The Roles of Private Associations in Rulemaking and Adjudication, American
Law and Economics Review 18: 237–73.

3
purchase and set aside of local ecologically-valuable terrain. These arrangements are subject to
transaction cost constraints as examined by Mulligan (2023). 8
Coasean bargaining also is observed to lower the compliance costs with prior Pigouvian
controls. Deryugina et al (2021) provide examples of polluters purchasing nearby lands as
offsets, payments by consumers and government agencies for ecosystem services, and land
acquisitions by government bodies and environmental NGOs to protect the supply of drinking
water. 9 Costello and Kotchen (2022) examine Coasean exchange alongside centralized
government restrictions to control externalities.10 They argue that property rights of some type
and related trade reduces the costs of Pigouvian quantity regulations. They provide descriptive
examples of bargaining to promote public goods provision. They do not examine, however, why
mandates, rather than property rights and trade, were implemented in the first place. 11
In broader settings, Coasean bargaining primarily remains around the edges of Pigouvian
controls. One might argue that this empirical regularity is consistent with differences in
transaction costs. Indeed, Coase cautioned that transaction costs could affect when and how
property rights could be assigned for his bargaining framework (1960, 15), a caution repeated by
Demsetz (1964, 12).12 In large-scale situations the costs of assigning rights and negotiating
externality remedies could be just too high. Pigouvian approaches could be the low transaction-
cost alternatives.
While a reasonable conjecture, as described below, the legislative histories of major US
environmental and natural resource policies reveal no comparison and selection of a welfare-
improving, low-transaction cost remedy, Coasean or Pigouvian. Rather the choice of
institutional forms as regulatory arrangements was based importantly upon rent-seeking

8
Mulligan, C.B. (2023) Beyond Pigou: externalities and civil society in the supply–demand framework. Public
Choice. 196: 1–18.
9
Deryugina, T., Moore, F., and Tol, R. S. J. (2021) Environmental applications of the Coase Theorem.
Environmental Science and Policy 120: 81-88.
10
Costello, C. and Kotchen, M. (2022) Policy Instrument Choice with Coasean Provision of Public Goods Journal
of the Association of Environmental and Resource Economists, 9 (5).
11
Costello and Kotchen assert that Coasean provision affects policy instrument choice. The underlying assumption
is that ex ante politicians and agency officials consider how regulatory stringency, costs and delivery would be
affected. There is no reference to legislative history to demonstrate such forward considerations. They show ex post
responses to policies with additional provisions that affect administration of the central policy. There is no public
choice analysis of political incentives in initial policy development.
12
Coase, R.H. (1960). The problem of social cost. The Journal of Law and Economics 3: 1–44; Demsetz, H. (1964).
The exchange and enforcement of property rights. The Journal of Law and Economics, 7: 11-16.

4
objectives (Krueger 1974 and Tullock 2005) in the political arena, not upon efforts to economize
on transaction costs.13
Political rents are standard pecuniary net returns from partisan resource assignment,
commercially-preferential regulations, and subsidies. They also include value-based or psychic
non-pecuniary returns from strongly-desired policies. In either case, policy-linked rents are
provided to political agents at lower direct cost and to greater extent than ex-ante cost/benefit
criteria would suggest. There is no evidence that transaction cost tradeoffs from adoption of
Coase or Pigou were presented to policy makers or weighed seriously at the time the legislation
was considered
Transaction costs influence economic behavior and organizational innovation when they
constrain pecuniary net returns or profitability. Efficient, albeit second-best, arrangements are the
outcomes of agent efforts to mitigate their effects. In the firm-level analyses of Coase (1937,
1992) and Williamson (1975, 1986, 1996), there is far less opportunity or role for partisan rent-
seeking via government intervention than exists in Coase’s (1960) externality policy arena. The
legislative histories reveal that observed Pigouvian constraints are imposed as result of
negotiations among influential interest groups and their political and bureaucratic patrons.
As detailed by McCubbins, Noll, and Weingast (1989) for the Clean Air Act, the political
process is a complicated one, involving lobbyists, the courts, and the differential incentives of
members of the House, the Senate, and the President. 14 Even so, there are distinct objectives
driven by philosophical, economic, and re-election concerns. 15 These are characteristics of
bargaining over Pigouvian rents, not of Coasean trades. The framework outlined by Coase based
upon private property rights and markets is more open; generates more information on costs and
benefits and their distributions; and leaves far too much beyond the control of politicians,
administrative agencies, and advocacy groups.

13
Krueger, A.O. (1974) The Political Economy of the Rent-Seeking Society, American Economic Review, 64 (3):
291-303. Tullock, G. (2005) The Rent Seeking Society.
14
McCubbins, M., Noll, R.G., and Weingast, B.R. (1989). Political Control of Agencies. Virginia Law Review 75:
431-482.
15
Discussion of lobbying and exchanges with politicians is in Bombardini, M. and Trebbi, F. (2020). Empirical
Models of Lobbying. Annual Review of Economics. 12:391-413. See also, Alex Aces (2024) Influence Seeking in
the Federal Bureaucracy: Do Groups Lobby or Monitor Policymakers? Quarterly Journal of Political Science 19(1):
27-52.

5
 Although there may be generalized benefits to citizens, the adopted Pigouvian approaches
may not be the low-cost or general welfare-improving ones (Sallee 2019). 16 Low transaction cost
or broad public goods provision are unlikely be the objective of self-interested agents in the
political arena. Important beneficiaries of Pigouvian controls are politicians, seeking reelection;
agency officials, seeking regulatory roles and budgets; and successful lobby groups, seeking
favored and at least partially self-serving policies. 17 The returns provided those parties through
the political process, would be more limited in the more decentralized, market-oriented
abatement regime described by Coase that tacitly balanced costs and benefits. 18
To frame the analysis, two notions of property are used, economic property rights and
political property. Economic property rights underly Coase. They grant tradable rents or
monetary returns to rights holders as defined and protected within the legal structure. These
property rights implicitly are held by agents in negotiating firm-level institutional or governance
adjustments. Negotiating agents are the residual claimants to the efficiencies afforded by
institutional innovation. By contrast, political property is a privilege, based upon political
guarantees. It generally is not a formal property right. Political property assigns non-tradable
rents to influential interest groups through policy. Lobbying molds policies and associated rents.
It is not the case that lobbyists seek rents molded initially and independently by policy makers.
Rather the outcome of bargaining over Pigouvian rents will involve the combined objectives of
lobby interests, sometimes driven by court rulings they initiated, the differential aims of elected
officials, and the goals of administrative agency officials McCubbins, Noll, and Weingast (1989).
Under Pigouvian regulation, compensation is not required (Kaldor/Hicks 1939), and in
the absence of trades, comparative policy cost and benefit tradeoffs are not clearly revealed to
general citizens.19 Because the broad citizenry faces both high collective action and information

16
Sallee, J.M. (2019). Pigou creates losers: On the implausibility of achieving pareto improvements from efficiency-
enhancing policies. Cambridge: NBER Working Paper 25831. May.
17
Politicians, of course, provide public goods, but because each voter’s share of the public good is small, it is
difficult to attribute it to a particular politician. All voters receive the public good and there may be many political
claimants. Private goods on the other hand are far easier to link to a political provider. Because both public and
private goods provision requires political resources, politicians weigh tradeoffs with a bias toward private good
provision.
18
The approach here is not the efficiency, competitively-driven lobby outcome described theoretically by Becker:
Becker, G. (1983). A theory of competition among pressure groups for political influence. Quarterly Journal of
Economics 98: 371–400.
19
Kaldor, N. (1939). Welfare propositions in economics and interpersonal comparisons of utility. The Economic
Journal. 49 (195): 549–552. Hicks, J. (1939). The foundations of welfare economics. The Economic Journal. 49
(196): 696– 712.

6
costs, any general negative welfare effects, unless very large, are difficult for citizens to discern
and to oppose. Proponents have little interest in advertising such costs. Smaller, organized, and
more homogeneous interests can promote desired programmatic outcomes, bearing primarily
only lobby costs. In turn, they can promise political and bureaucratic supporters electoral and
financial support. When there are competitive interest groups, political property or politically-
based rents are more limited, but when a single, prepared group dominates, political property and
rent-seeking are more extensive, costly, and secure across political cycles. 20
Because Pigouvian policies can be broadly suboptimal, there are profitable opportunities
to correct them. Society as a whole and holders of economic property rights more narrowly
would benefit from such exchange, as Coase argued. Holders of political property, however, are
unlikely to gain, and they organize to oppose market exchange compared to policy mandates.
Through the political process and limited interest group competition, they receive positive net
returns via desired property rights distributions or favored regulatory policies.
The objectives of some interest groups in environmental externality mitigation are both
pecuniary and nonpecuniary, based on strongly-held philosophical values. The former are
economic returns from policies that provide subsidies and/or competitive advantages. These are
directed pecuniary rents. The latter are value-based preferences that are not amenable to
negotiation, modification, subdivision, and Coasean exchange. Neither would be problematic
except that through political lobbying, advocates achieve their objectives at low direct cost. This
potentially leads to excessive mitigation demands that lower overall welfare, even if some public
goods are provided. Recipients of such rents would resist market negotiations where the long-
term viability and nature of policy mandates could be difficult to predict and privately more
costly to achieve.

20
It is remarkable given the role of government that a critical public choice literature on lobbying and government
environmental regulation appears to be so limited. Generally, see Peltzman, S. (1976). Toward a more general theory
of regulation. The Journal of Law and Economics. 19 (2): 211-40; Olson, M. (1965). The Logic of Collective Action.
Cambridge; Stigler, G. J. (1971). The economic theory of regulation, Bell Journal of Economics, 5, 3–21; Buchanan,
J. M. and Tullock, G. (1962). The calculus of consent.; Becker, G. (1983). A theory of competition among pressure
groups for political influence. Quarterly Journal of Economics. 98 (3): 371–400; Laffont, J.J. and Tirole, J. (1991)
The Politics of Government Decision-Making: A Theory of Regulatory Capture. The Quarterly Journal of
Economics, 106 (4): 1089-1127 and Johnson, R.N. and Libecap, G.D. (2001) Information Distortion and Competitive
Remedies in Government Transfer Programs: The Case of Ethanol. Economics of Governance 2: 101-134.

7
 To understand the role of rent-seeking in externality mitigation, two empirical cases are
provided in detail. The first is the Magnuson-Stevens Fishery Act of 1976. The law implemented
uncompensated, Pigouvian-style controls on fishery inputs and outputs, sixteen years after
Coase’s paper. No property rights or bargaining was employed to confront race-to-fish
externalities. The mandates, based upon biological maximum sustainable yield estimates,
however, failed to control overfishing. In 1996, twenty years after initial constraints and thirty-
six years after Coase, limited property rights to fish were authorized, although delayed for
another five years.
Profits and broad economic net benefits implicitly were foregone in fishery rights
definition and quota setting.21 The property rights did not allow for negotiations among rights
holders to determine overall fishing quotas; they explicitly were not a legal property right; they
were distributed to politically-targeted parties; and exchange was constrained. The political
objective was to maintain politically-sensitive, historic fishing communities, limit entry by larger
vessels and related capital-intensive innovation, as well as to prevent cost-effective fleet
consolidation. The general efficiency of the fishing industry and its net economic contribution to
the economy was not the primary aim of negotiations among relevant politicians, lobby group
members, or some agency officials.
The second case illustrating the role of political property, rent-seeking, and the potential
reduction of broad economic returns, is the Endangered Species Act of 1973 (ESA). Although
species protection legislation prior to the ESA relied upon a Coasean framework for critical
habitat acquisition, the 1973 law introduced uncompensated Pigouvian restrictions on land use.
Advocates sought strict regulatory controls and penalties, not exchangeable property rights. The
political objective was to promote species recovery with implied low budget expenditures.
Targeted properties did not have to be acquired nor did compensation have to be paid to land
owners. Despite being the poster child for US environmental regulation, the law has been
politically controversial and not obviously effective.

21
Grainger and Costello (2014) compare dividend price ratios (lease price/sales price) for weak fishery rights in the
US and compare them with the secure property rights in New Zealand. Dividend price ratios are higher in the US as
parties relied more upon short-term leasing than sales. Grainger, C.A. and Costello, C.J. (2014). Capitalizing
property rights insecurity in natural resource assets. Journal of Environmental Economics and Management 67 (2):
224-240.

8
 The Magnuson-Stevens Fishery Act and the Endangered Species Act appear typical of
Pigouvian US environmental and natural resource externality policies. The paper proceeds as
follows: Section II summarizes economic property rights, Coase’s arguments, and the observed
role of political property or rent-seeking in environmental policies. Section III summarizes US
Environmental and Natural Resource policies from 1970. Section IV presents US fishery
regulation; and Section V the Endangered Species Act. Section VI concludes.

II. Transaction Costs, Economic Property Rights and Political Property.

This section elaborates economic property rights, political property, and their relationship
to transaction costs and observed economic institutions.

A. Economic Property Rights

The pecuniary benefits and efficiencies of economic property rights and the legal
institutional framework they provide underly the organizational patterns analyzed by Williamson
(1975, 1985, 1996) and Coase (1937, 1992). Demsetz (1996) described the development of
property rights by agents as economic institutions in response to changing benefit/cost
calculations. His contractual adaptation to transaction costs is like Williamson’s for firm
governance: Economic property rights are created or adapted (1967, 350): “in response to the
desires of the interacting persons for adjustment to new benefit-cost possibilities.” As with firm
governance, property rights were dynamic institutions that varied in completeness and specificity
across time and space. Agent efforts not only advanced individual welfare, but through market
expansion, generated broader economic gains. 22
Economic property rights define asset ownership, support trade, and allow for
contractual innovation. They determine who has the recognized right to make decisions about
asset use, organizational and contractual forms, and trade and who captures the resulting returns.
To maximize net returns, property rights require exclusivity, stability, durability, and

22
Demsetz, H. (1969). "Information and Efficiency: Another Viewpoint". The Journal of Law & Economics. 12 (1):
1–22 (1988) The Theory of the Firm Revisited, The Journal of Law, Economics, and Organization, 4 (1): 141- 161;
Demsetz, H. (1967). Toward a theory of property rights. The American Economic Review, Papers and Proceedings,
57 (2): 347-359.

9
exchangeability.23 These characteristics vary due to transaction costs and local assessments of
fairness, openness, and morality.24 For Demsetz, as with Williamson and Coase, actual property
rights would not be idealized institutions, but ones that were adjusted to actual conditions as
second-best. He cautioned against nirvana comparisons of transaction-cost free institutions with
observed ones. The potential monetary gains, cost savings, and efficiencies from property rights
and exchange were the bases for Coase’s negotiated alternative to mandated Pigouvian
constraints.
Coase (1960) criticized centralized government intervention to mitigate externalities. He
argued that automatic imposition of a Pigouvian “polluter pays” tax (Pigou 1920) to equate
marginal social costs and benefits, placed all adjustment costs on the “polluter” and granted
disproportionate benefits to the “pollutee.” 25 The resulting differential incentives led “pollutees”
to seek unwarranted, nonoptimal outcomes, driving up costs and making marginal net social
benefits negative, lowering aggregate welfare. Moreover, because they did not provide a
property right, government policy mandates that inflicted differential costs and benefits were not
tradable in response to new information.
Coase (1960, 18, 27) contended that a government-imposed remedy for externalities
could be more costly than the problem. His counter was to acknowledge the reciprocal nature of
externalities across polluters and pollutees, assign tradable property rights, and allow for
bargaining for mitigation. With exchange, marginal willingness-to-pay would be equated with
marginal willingness-to-accept among the trading partners. Through voluntary, open trade,
private marginal costs and benefits would become equalized, and serious imbalances in costs and
benefits avoided.26 A more optimal externality level would result (generally not zero) with all
parties having a tie to negotiated outcomes.

23
The key attributes of economic property rights are outlined in Arnason, R. (2012). Property rights in fisheries:
How much can individual transferable quotas accomplish? Review of Environmental Economics and Policy. 6, 217–
236; Runolfsson, Birgir (2024) Measuring Quality of Property Rights: Development of User Rights Quality in the
Icelandic Fisheries. Marine Policy, 160. February.
24
Merrill, T. W. and Smith, H.E. (2007). The Morality of Property. William and Mary Law Review 48: 1849; Wilson,
B.J. (2020). The property species: Mine, yours, and the human mind. 15.
25
Pigou, A. C. (1920). The economics of welfare. London: Macmillan.
26
Depending on market conditions, some trading parties may gain more surplus, so that their benefits relative to
costs exceed those of other traders. Nevertheless, with voluntary markets and ease of entry and exit, these ratios
would not be too different. On the other hand, with state regulation and distribution of costs and benefits,
adjustments are political and could be far more costly.

10
 Welfare conclusions about Coasean exchange and Pigouvian regulation required
comparing the transaction costs and efficiency outcomes of each. It is not clear that Pigouvian
policies have lower transaction costs. Indeed, Coase (1960, 43) called for comparisons of likely
institutional outcomes from different policy recommendations. There is no obvious setting,
however, where political agents engage in such transaction cost evaluations or have an incentive
to do so. Nor do these appear in the legislative histories outlined below.
Neither Coase nor Demsetz analyzed the public choice factors that would affect
government policies for property rights definition, distribution, and market exchange. The
potential rent-seeking efforts by some agents in the political arena, however, could be far more
constraining on observed institutions than transaction costs. Williamson also did not explore
public choice because the firm and market-level organizational innovations of concern to him
generally did not invite political entry, rent-seeking, and costly institutional manipulation.

B. Political Property

Political property and rent seeking are introduced in the analysis to explain why
Pigouvian externality mitigation dominates US environmental legislation. As noted, there is no
evidence in legislative histories that they were presented to policy makers as the low transaction
cost alternative to Coase. The approach here is to examine other motivations behind the statutes.
One return to political property is the economic returns it grants to holders through
policy-based subsidies or competitive advantages. Another return from preferred mitigation
policy is achieving value-based, nonpecuniary objectives. Both are policy-generated rents.
These rents are channeled by politicians and agency officials to critical constituencies who
lobbied for them as rent seeking (Krueger 1974). Sought-after policies, secured through lobbying
are exchanged for constituent backing. These will not obviously be the low transaction cost
solutions.
Political property is neither flexible nor tradable. A narrow interest group focus is
unlikely to maximize overall resource values or broad economic net returns. At least in the short
term, special interests and their political supporters do not have to fully weigh generalized
economic tradeoffs. Broad concerns about net economic impacts vary, of course, across the

11
President, members of the Senate, and the House because each have different constituencies and
electoral timelines.27
The outcome of bargaining over political property is stable so long as political coalitions
endure. Absent exchangeable instruments, there are few ready options for longer-term
adjustments. Moreover, once in place the distribution of known rents generates entrenched
stakeholders—members of the lobby groups and administrative agencies, who would resist any
subsequent redistribution.28 Over time with dedicated rent distributions, congressional oversight
and control of agency actions becomes less effective. Remedial legislative actions become more
costly.29
The degree to which transaction cost efficiencies are neglected, tradeoffs are not
assessed, and the distribution of costs and benefits is unbalanced depends upon information
available to citizens, competition among politicians and lobby groups, and overall policy-based
costs. The latter can generate voter reaction, new interest group formation, and a breakdown in
political coalitions. When policies provide a mix of public goods and narrow-based political
returns, it is more difficult for citizens to assess general costs and benefits. Political property
rents may be hard to disentangle from public goods provision, and rent holders have incentives to
blend and distort information on the policy mix.
Economic property rights and markets potentially undermine both static political
hierarchies, lobby group relations, and cost/benefit distributions. It is unlikely to be in the
interest of political property claimants and relevant politicians to reduce transaction costs to
promote such exchange. While markets thrive upon disequilibrium, entry, as well as the
generation and release of new information, hierarchical political structures do not. Rent seeking
provides successful lobby groups and responding politicians and agency official benefits beyond
what they might receive through economic property and market exchange.
To answer the question, why Pigou and not Coase, the legislative histories of
environmental regulation in Table 1 are explored. As indicated, political property advocates seek
the certainties of mandated Pigouvian controls at low direct cost with associated limited release

27
McCubbins, Noll, and Weingast (1989).
28
The persistence of ethanol subsidies despite the absence of any environmental or national security benefits is a
telling example. See Bielen, D.A., Newell, R.G. and Pizer, W.A. (2018) Who Did the Ethanol Tax Credit Benefit?
An Event Analysis of Subsidy Incidence. Journal of Public Economics 161: 1-14.
29
McCubbins, Noll, and Weingast (1989).

12
of actual cost and benefit information and their distributions to general voters. Absent exchange,
there is no obvious mechanism to present cost/benefit information to citizens. Coasean market
approaches, by contrast, challenge the rents obtained by political property holders by requiring
that they pay for them, devoting actual budget outlays, and advertising policy outcomes.

IV. US Environmental and Natural Resource Externality Regulation. An Absence of Coase.

This section illustrates the how the property rights and bargaining remedies to
externalities provided Coase (1960) have not been at the forefront of US environmental and
natural resource policies. Political property and rent-seeking, not transaction costs, are the
primary explanations.
Table 1 lists the major US federal government laws enacted since 1970. 30 None are
perceptibly Coasean. Although there are some authorized Coasean exchanges especially later
31
well after adoption, they are not the main thrust of the laws, which primarily are Pigouvian. In
at least one case, the Endangered Species Act, a preexisting Coasean approach was rejected for
Pigouvian mandates.

Table 1: Major US Environmental and Natural Resource Laws

Clean Air Act and Amendments, 1970, 1977, 1990 . National air quality standards; regulate
stationary/mobile source emissions; automobile emission standards; prohibit significant air quality
deterioration; reduce acid rain; phaseout of pollutants depleting stratospheric ozone. 42 USC 7401.

National Environmental Policy Act, 1970. EPA federal enforcement agency; White House Council
on Environmental Quality; environmental impact statements by federal agencies. 42 USC 4321.

Clean Water Act, 1972, 2003. Restore US waterways as fishable and swimmable. Regulates point
pollution sources; agriculture generally exempted; groundwater not covered. 33 USC1251.

Federal Environmental Pesticides Control Act, 1972. EPA regulation of pesticide use. 7 USC135.

Endangered Species Act, 1973. Protection of species threatened with extinction; strict habitat
protection; ban on disturbing or importing endangered species. 16 USC 1531.

30
Van Doren, P. and Firey, T.A. (2017). Regulation at 40, Regulation Spring.
31
Hann (1999) had a more optimistic assessment of the potential for Coasean approaches and the role of economists
in environmental policies. He lists various cap and trade programs at the federal and state level. He wrote at a time
of optimism that more recent evidence likely does not support. As environmental programs have received more
political attention, become more constraining, and received far more funding, the opportunities for rent seeking and
political property have grown. Pigouvian mandates remain dominant. See Hahn, R. W. (1999) The Impact of
Economics on Environmental Policy. Journal of Environmental Economics and Management 39: 375-399.

13
Federal Land Policy and Management Act, 1976. Broaden mission of Bureau of Land Management
as federal lands administrator; repeal most remaining homestead laws. 43 USC 35.

National Forests Management Act, 1976. Forest Service lands management. 16 USC 1600.

Surface Mining Control and Reclamation Act, 1977. Regulate coal mining on or near certain federal
lands. 30 USC. 25.

Magnuson-Stevens Fishery Management Act, 1976. US fisheries within 200 miles. 16 USC 38.

Toxic Substances Control Act, 1976. EPA regulation of certain chemical substances. 15 USC35.

Public Rangelands Improvement Act, 1978. Administration of government rangelands 43 USC 37.

To illustrate how far federal environmental regulation is from a Coasean approach,

consider the Clean Water Act (CWA) of 1972 (33 USC 1251), the country’s primary water
pollution control law. It sets quality standards for pollution discharges from point sources--
industrial and municipal wastewater treatment facilities. 32 The standards are set to “maintain the
chemical, physical and biological integrity of the Nation's waters.” 33Antidegradation
requirements are prescribed. The standards are not fixed via negotiation as would be the case
with Coase. Weighing marginal costs and economic benefits in setting standards and compliance
requirements are not integral. Under the law, conditional operation permits are granted by the
Environmental Protection Agency (EPA) to facilities, and response is monitored. Tradable,
water-quality discharge permits around the standards were not authorized until 2003, thirty years
after the CWA was enacted. At that time rivers, streams, and lakes often still did not meet
Pigouvian mandated quality requirements. 34 Trading was not to define or reassess standards
economically, but rather to lower the costs of meeting them.
Consider also the US Clean Air Act of 1970 (CAA) (42 U.S.C. §7401 et seq.) and its
amendments of 1970, 1977 and 1990. 35 The act is the principal air quality law for the US. It
defines federal government regulation of air pollution through National Ambient Air Quality
Standards, State Implementation Plans, New Source Performance Standards, and National
Emission Standards for Hazardous Air Pollutants. The regulations set emissions limits for

32
https://www.epa.gov/history/epa-history-federal-water-pollution-control-act-amendments-1972.
33
h ps://www.epa.gov/wqs-tech/what-are-water-quality-standards.
34
https://www.epa.gov/system/files/documents/2022-12/Water-Quality-Trading-Policy.pdf.
35
Van Doren, P. and Firey, T.A. (2017), Regulation at 40, Regulation Spring, 34-36.

14
stationary and mobile sources. Emission standards are based on integrated science assessments,
and economic considerations are not directly relevant. Indeed, costs are explicitly not to be
considered in administration of the law. 36 Key pollutants are carbon monoxide (CO), lead (Pb),
particulate matter (PM), ozone (O3), nitrogen dioxide (NO2), and sulfur dioxide (SO2). Source
emissions within a regulated area typically are not tradable, which might otherwise take
advantage of differences in abatement costs as would occur under Coase.
The 1970 Amendments authorized the EPA to set uniform national ambient air quality
standards and emissions standards for new stationary sources of pollutants. They also authorized
the EPA to set emissions standards for both new and old sources of hazardous air pollutants.
States were to implement the rules, and the EPA could impose a plan if states did not comply. 37
The 1977 Amendments revised Prevention of Significant Deterioration (PSD) of Air
Quality Standards for all areas meeting or exceeding air quality requirements. Initially
promulgated in the early 1970s by the EPA, the rules initially were designed to reduce
particulates, SO2, and NOx emissions, primarily from coal-fired power plants and industrial
firms. The issue was whether the PSD mandated air qualities were to be maintained, even in
regions where qualities were well above national levels. Under the CAA, economic tradeoffs
were not directly to be weighed. A broad application of PSD was strongly supported by
environmental organizations. When the EPA initially determined that Congress had not intended
to impose PSD on regions with very air qualities, the Sierra Club successfully sued, and the
Supreme Court held that PSD applied to all states. 38
The revised PSD requirements potentially instilled competitive advantages. The strict
PSD requirements limited the ability of firms to relocate from more polluted states to those with
high air qualities. Such conditions typically existed in regions with sparse populations, less
economic development, and lower costs of compliance with the law. After much political
negotiation across five years involving lobbyists, the EPA, and members of the House and
Senate, the strict PSD requirements sought by the Sierra Club were put into place by Congress
and the EPA. Nationwide New Source Pollution Standards (NSPS) and PSD restrictions were

36
The US Supreme Court ruled in 2001 in Whitman v American Trucking Associations Inc (531 U.S. 457), that the
Clean Air Act “unambiguously bars cost considerations from the [pollution limits]-setting process.”
37
McCubbins, Noll, and Weingast (1989, 450).
38
Sierra Club v. Ruckelshaus, 344 F. Supp. 253 (D.D.C. 1972), aff'd per curiam by an equally divided Court sub
nom. Fri v. Sierra Club, 412 U.S. 541 (1973).

15
almost as demanding on new facilities in unpolluted areas as if they had remained in polluted air
regions.39 The aim was to improve air qualities and block a redistribution of economic activity.
The policies, inherent in Pigouvian negotiations to distribute political property rents, made air
quality improvements more costly than necessary. 40
Congressional voting patterns on the final 1977 amendments are consistent with efforts to
impose PSD costs on regions where economic activity might move. Members of Congress from
more urban, industrial Northeastern, MidAtlantic, and New England states voted for PSD, and
those from more rural southern and western states voted against. The controls potentially locked
restricted regions into possibly lower incomes, fewer industrial plants, and higher air quality.
They might have been willing to exchange some air quality for marginally lower levels within
national air quality standards to achieve more economic growth. 41Those citizens however, were
not given that option under the law.
One high-profile Coasean-like program under the Clean Air Act was the cap-and-trade
system for national acid rain control under the 1990 amendments.42 These were adopted thirty
years after Coase and twenty years after the initial Clean Air Act. 43 Adjustable national SO2
limits were set based on ambient air quality standards, not on marginal cost and benefit
calculations.44 Within the Pigouvian caps, tradable emission allowances were granted to coal-
fired electricity generating facilities. Utilities were required to surrender one allowance for each

39
McCubbins, Noll, and Weingast (1989, 452-453).
40
McCubbins, Noll, and Weingast (1989, 467-468).
41
Pashigian, B. P. (1985). Environmental Regulation: Whose Self-Interests are being Protected? Economic Inquiry
23 (4): 551-74; see also Buchanan, J. M . and Tullock, G., (1975) Polluters’ Profits and Political Response: Direct
ControlsVersus Taxes,” American Economic Review, March: 139-47.
42
Schmalensee, R. and Stavins, R.N. (2019) Policy Evolution under the Clean Air Act. Journal of Economic
Perspectives. 33 (4): 27–50; https://www.epa.gov/history/epa-history-clean-air-act-1970 1977.
https://www.epa.gov/sites/default/files/2015-11/documents/the_clean_air_act_-
_highlights_of_the_1990_amendments.pdf.
43
Adjustable national SO2 limits were set with emission allowances within the cap granted to coal-fired electricity
generating facilities. Utilities were required to surrender one allowance for each ton of SO 2 emitted. Utilities could
transfer excess allowances across plants or firms or bank them. Allowance exchange allowed for the marginal cost
of compliance to be equalized across units and equal the allowance price. Utilities had incentives to innovate to
economize on allowances and to sell excess. Total SO2 emission goals were met more rapidly and at far lower cost
than had been forecast. Even so, the program lapsed and was not made a basis for subsequent federal air pollution
controls. As described by Anderson, T. L. and Libecap, G.D. (2014). Environmental Markets: A Property Rights
Approach, 159-166, The SO2 allowance market eventually collapsed as various subsequent regulatory interventions
to meet a variety of objectives undermined the security and trade of the allowances. See also Schmalensee, R. and
Stavins, R.N. (2013). The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment.
Journal of Economic Perspectives 2 7 ( 1 ) : 103-22.
44
https://www.epa.gov/so2-pollution/primary-national-ambient-air-quality-standard-naaqs-sulfur-dioxide.

16
ton of SO2 emitted. Utilities could transfer excess allowances across plants or firms or bank
them. Allowance exchange allowed for the marginal cost of compliance to the Pigouvian
standard to be equalized across units and equal the allowance price. Utilities had incentives to
innovate to economize on allowances and to sell excess. Total SO 2 emission goals were met
more rapidly and at far lower cost than had been forecast. Even so, the program lapsed and was
not made a primary basis for subsequent federal air pollution controls.
This experiment with Coasean-like exchange, including the phase down of lead in fuels,
has received considerable attention from economists. Coasean property rights and trading,
however, were not the mechanism for setting the air quality caps, and they did not become a
principal instrument for the law. The Clean Air Act remains Pigouvian. It is politically charged,
and no major amendments have been added since 1990. Although Schmalensee and Stavins
(2019) assert political polarization is the problem, they do not address the underlying reason for
sharp political differences. As suggested by the Endangered Species Act experience, a primary
source of conflict between advocates and opponents is competition over the political rents
associated with Pigouvian controls and the disproportionate net costs they impose. Regulatory
rents could be lost if Coasean trading were broadly implemented in the law.
Despite early optimism among some economists that cap and trade would become the
template for US greenhouse gas (GHG) emission controls, that too has not been the case. 45The
various federal and state regulatory efforts to address GHGs generally do not follow the national
market-based approach in the SO2 phase down, for example. Rather, the EPA, Congressional
legislation, and Presidential executive orders outline a myriad of non-tradable standards and
restrictions on emissions from oil and gas use, coal and natural gas-fired power plants, industrial
facilities, pipelines and other surface transport, along with subsidies and related tariffs for green
energy development and electric vehicles. 46 Even the much-heralded California air emissions

45
Stavins, R.N. (2007) Appendix to: A U.S. Cap-and-Trade System to Address Global Climate Change Applications
of Cap-and-Trade Mechanisms. Brookings: The Hamilton Project.
46
https://www.epa.gov/climate-change/climate-change-regulatory-actions-and-
initiatives#:~:text=EPA's%20Clean%20Air%20Act%20protections,air%20pollutants%20such%20as%20benzene.
Virtually none of the GHG control efforts involve tradable permits to equalize marginal reduction costs across
sources. There have been regional emissions trading schemes across states such as the Regional Greenhouse Gas
Initiative (RGGI), involving Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island, and Vermont to cap and reduce CO 2 emissions from the power
sector. https://www.rggi.org/. See also provisions in the Inflation Reduction Act of August 16, 2022 that primarily
authorized major government funding as industrial policy toward climate change targets. The relative successes of
the national SO2 allowance market and a similar, more localized program (RECLAIM) in the Los Angeles Basin to

17
auction and trading program, AB 32, enacted in 2006, has not been the state’s principal
mechanism for addressing greenhouse gases and other pollutants. 47 Auction revenues have been
earmarked and distributed to directed constituencies by politicians and agency officials. This
pattern illustrates the importance of political property rents to politicians, agency officials, and
recipient interests.48
To illustrate how social and political property objectives, rather than transaction costs
explain the absence of Coase’s framework, the following section examines the legislative history
of US fishery regulation. The problem of fisheries was overfishing because of open access. The
Coasean solution would have been to assign property rights to fish; allow negotiation to
determine the total allowable annual harvests; and exchange to reduce the number of fishers and
catch. That approach was not chosen in the 1976 law, and limited property rights and trading
exchange were not incorporated until twenty years later.

V. Rent-Seeking, Political Property and US Fishery Externality Regulation.

The Magnuson-Stevens Fishery Conservation and Management Act of 1976, as listed in

Table I and its reauthorizations in 1996 and 2006, are the principal fishery regulatory statutes for
the US.49 The 1976 law did not call for property rights to address overfishing, even though
losses of open access were apparent. Coasean arguments for mitigation had been described
sixteen years earlier. Instead, Pigouvian-style regulations that Coase so sharply criticized were
put into place. Only the l996 and 2006 amendments to the law Magnuson-Stevens, thirty-six and
forty-six years after Coase, finally authorized restricted property rights and exchange. By
contrast, Iceland for example, introduced a property rights system in 1975.
Beyond Coase, there were prominent academic calls for property rights’ remedies for
overfishing before the 1976 Magnuson-Stevens Act by Gordon (1954), Scott (1955) and Christy

lower NOx and SOx emissions with cap-and-trade permits within a tightening total allowance could have been the
basis for a much broader use of Coasean approaches. None of the environmental laws in Table 1 were amended to
include widespread assignment and use of economic property rights or Coasean cooperation in externality control.
47
https://ww2.arb.ca.gov/our-work/programs/california-climate-investments/california-climate-investments-funded-
programs.
48
AB 32 Cap and trade. See Carl, J and Fedor, D. (2014) An Energy Policy Essay for California’s AB 32 Cap-and-
Trade-and– Cash Back, not Cap-and-Trade-and-Tax. Shultz-Stephenson Task Force on Energy Policy
www.hoover.org/taskforces/energy-policy.
49
Public Law 94–265, 1976, 90 Stat. 331; Public Law 104-297 1996, 110 Stat. 3559; Public Law No: 109-479 121
Stat. 3575, 2007.

18
(1973).50 Christy, for example, described a Total Annual Allowable Catch (TAC) to be set in
each fishery with a corresponding assignment of catch shares or individual transferable quotas
(ITQs) as property rights within the TAC. The catch shares would be freely transferable.
With the fishery closed to all but shareholders and shares valuable only so long as the
relevant stocks were protected, fishers could set the TAC. The incidence of and incentives for
overharvest would be reduced. With tradable shares, the number of fishers, vessels, and related
equipment and crews could be reduced as needed in any over-capitalized fishery. Because share
values depended upon product value and costs, owners had an incentive to search for new
techniques, lower-cost vessels, more effective gear, and new markets with higher-valued fish
products.
Instead, the Magnuson-Stevens Act of 1976 called for Pigouvian limited-entry and input
or output controls. Centralized regulation did not provide tradable instruments for eliminating
excess vessels and labor or to direct production to the most efficient producers. Fishers remained
motivated by the race to fish, and within limited entry, made licensed vessels more powerful
with more storage space. Overall, harvests did not decline, and fish stocks fell. Regulators
responded with additional limits on net sizes, trawls, and fishing seasons, but harvests and
economic returns continued to fall.51 Catch shares were not implemented until 1990 and 1992 in
only three US fisheries. Further adoption was placed on hold in 1996 for five more years.
Although there would have been transaction costs in assigning property rights in
fisheries, the major factors affecting their design were political objectives to protect traditional
fishing operations and communities. Regulated fisheries under the 1976 law were characterized
by redundant capital and labor in fishing, excessive storage, processing, and vessel support.
Economically-unnecessary numerous, small vessels, and fishers, however had political,
bureaucratic, NGO, and academic patrons. Tradable fishing rights could migrate to larger-scale,
more capital-intensive commercial fishers, based in other states. In his study of property rights

50
Gordon, H. S. (1954). The economic theory of a common-property resource: The fishery. Journal of Political
Economy, 62(2): 124-42. Scott, A. (1955). The fishery: The objectives of sole ownership. Journal of Political
Economy. 63. 116. Christy, F.T., (1973). Fisherman quotas: a tentative suggestion for domestic management. Law of
the Sea Institute, Univ. Rhode Island, Occ. Pap. No. 19, June.
51
Johnson, R.N. and Libecap, G.D. (1982). Contracting problems and regulation: The case of the fishery. The American
Economic Review, 72 (5): 1005-1022; Grafton, R.Q., Squires, D., and Fox K.J. (2000). Private property and economic
efficiency: a study of a common-pool resource. The Journal of Law and Economics, 43(2), 679-714.

19
in fisheries Hannesson (2006, 173) commented that inefficiencies created their own
constituencies.52
Congressional hearings on the Reauthorization of the Magnuson-Stevens Act in 1995 and
1996 reveal constituent positions on the assignment of property rights. 53 Across various fishing
regions, North Pacific, New England, MidAtlantic, and Gulf Coast, parties lobbied for
preferential property rights assignments and the rents they provided. In general, larger
commercial fishers favored tradable catch shares that could be consolidated. Smaller commercial
and recreational fishers opposed due to claimed harm to local practices. Environmental NGOs
typically were against, concerned about biological targets that could be threatened by more
efficient, larger vessels. There also was philosophical opposition among academics to assigning a
private property right to an ostensible public resource. No party called for the negotiated setting
of the TAC, as would occur under Coase.
Ultimately, the 1996 reauthorization of Magnuson Stevens defined catch shares as narrow
usufruct harvest permits that could be revoked at any time without compensation, and not be
renewed: “shall not create, or be construed to create, any right, title or interest in or to any fish
before the fish is harvested.”54Transferability was limited to prevent vessel consolidation and
generally to retain a small-vessel, community-based fishery. 55
The fishery rights granted were complex, based in large part on political objectives. They
included community development quotas, individual fisher quotas, cooperative quotas,
individual processor quotas, and individual transferable quotas. Community development quotas
were granted to Western Alaska natives with little fishing experience to contract with actual
fishers via annual leases. Cooperative fishing quotas were delegated to members and generally
short-term share transfers could only occur within the group. Individual fisher quotas and

52
Hannesson, R. (2006). The privatization of the oceans. Cambridge, MA: MIT Press.
53
S. 39, hearing on the reauthorization of the Magnuson Fishery Conservation and Management Act: hearing before
the Subcommittee on Oceans and Fisheries of the Committee on Commerce, Science, and Transportation, United
States Senate, One Hundred Fourth Congress, first session, March 4, 1995, Boston, Massachusetts; March 25, 1995,
Anchorage, Alaska; May 13, 1995, New Orleans, Louisiana; July 15, 1995, Charleston, South Carolina.
54
16 U.S.C. § 1853a(b), (16 USC as amended 110 Stat 3576-77. Courts held that fishing licenses and permits do not
function as property protected by the Fifth Amendment Takings Clause. American Pelagic Fishing Company v. U.S.,
379 F.3d 1363. Courts held that fishing licenses and permits do not function as property protected by the Fifth
Amendment Takings Clause. American Pelagic Fishing Company v. U.S., 379 F.3d 1363.
55
Marine Resource Economics, Volume 24, pp. 329–359 0738-1360/00 $3.00 + .00 Printed in the U.S.A. All rights
reserved. Copyright © 2010 MRE Founda on, Inc. Fleet Restructuring, Rent Genera on, and the Design of
Individual Fishing Quota Programs: Empirical Evidence from the Pacific Coast Groundfish Fishery Carl Lian NMFS,
Northwest Fisheries Science Cen. Rajesh Singh Quinn Weninger

20
individual transferable quotas allowed for broader short-and long-term exchanges (leases and
sales), but generally were subject to limitations. These included bounds on total vessel catch
shares held, requirements for crew and onboard captain exchanges, and caps on total vessel
capacities to promote smaller vessels. Processor fishing quotas were transferable, typically only
among processors. 56
The conflicts over rights assignment; the complexity of those granted; transferability
controls; and the qualification that they were not legally-recognized property rights, underscore
political rent seeking in property rights assignment and constraints on market exchange.
Transaction costs influenced the physical nature of the right as an extraction right (right to fish)
instead of ownership of migratory, unobserved stocks. Actual arrangements, however, were
relatively vague and potentially short term, and they were political property distributed to target
constituencies. These were improvements over previous Pigouvian regulated limited entry
regulation. They were not the property rights envisioned by Coase to efficiently confront the
race to fish externalities and to maximize fishing economic net returns.

VI. Rent Seeking, Political Property, and the Endangered Species Act.

The second environmental legislation examined is the Endangered Species Act (ESA) of
1973 (16 USC 1531). The legislative history and empirical evidence demonstrate the role of
political property as well as what is lost in externality mitigation when Pigou, rather than Coase
is used. The feasibility of a Coasean alternative is described. For terrestrial species, the
regulatory agency is the Fish and Wildlife Service (FWS) and for marine, the National Oceanic
and Atmospheric Administration (NOAA).
The ESA has been labeled the most powerful environmental law in the country, if not the
world.57This judgement follows from its strict prohibition of human actions that could harm
targeted species, enforced by civil and criminal penalties. As such, its thrust is clearly Pigouvian.
The judgement also is not from demonstrated successes.

56
Holland et al (2015, 108-109) Holland, D.S., E. Thunberg, J. Agar, S. Crosson, C. Demarest, S. Kasperski, L.
Perruso, E. Steiner, J. Stephen, A. Strelcheck, and M. Travis. 2015. US Catch Share Markets: A Review of Data
Availability and Impediments to Transparent Markets. Marine Policy 57:103–110.
57
See discussion and references in Adler, J.H. (2024). Tarnished Gold: The Endangered Species Act at 50,
Forthcoming in Florida International University Law Review, Case Research Paper Series in Legal Studies No
2023-11 (Rev. Jan. 2024), pp. 2-3.

21
 What is clear is that the law has become a lightning rod, surrounded by rancorous debate
in political competition over policy and the rents it provides. 58 The ESA has not been
reauthorized since 1988, although it continues under previous legislation, and budgets have been
more limited than biologists believe necessary for species recovery. Efforts to amend and
reauthorize the law have not made it out of committee for a Congressional vote. Mired in
disagreement, funding has been constrained by congressional opponents. 59
Section 4 of the ESA requires that species listed for the law’s protections are to be based
solely on the best available science “without reference to possible economic or other impacts of
such determination [italics added].” Although a 1978 amendment allowed for economic factors
to be considered in critical habitat designation (not listings), the centerpieces of the law remain
biological mandates and not collaborative, comparatively efficient, and potentially effective
solutions as Coase suggested. 60
There is no agency cost/benefit analysis that might otherwise focus attention on species
most apt to recover or to inform agency budget allocation and actions. Under the law, the FWS
must devote scarce resources to listed species, regardless of recovery potential. The agency is to
conserve species listed as endangered or threatened by using “all methods and procedures which
are necessary to bring any endangered species or threatened species to the point at which the
measures provided pursuant to this chapter are no longer necessary.” 61
Section 9 prohibits any unauthorized “taking” of endangered species on private lands (16
USC §1538). Taking not only includes killing, wounding, or capturing an endangered species,
but also destroying or adversely modifying its habitat. Violators are subject to fines and other
civil and criminal penalties.

58
See discussion in Wood, J. (2024), America’s Wildlife Habitat Conservation Act, Explained, and Hannah
Downey, H., Priest, J., Regan, S, Watkins, T., Wood, J., and Yablonski, M. (2023) A Field Guide for Wildlife
Recovery: The Endangered Species Act’s Elusive Search to Recover Species—And What to Do About It, Property
and Environment Research Center, Bozeman, MT.
59
Adler, J.H. (2024). Tarnished Gold: The Endangered Species Act at 50 101, Forthcoming in Florida International
University Law Review, Case Research Paper Series in Legal Studies No 2023-11 (Rev. Jan. 2024), p. 12. On
persistent under funding, see Eberhard, E.K., Wilcove, D.S., and Dobson A.P. (2022) Too Few, Too Late: US
Endangered Species Act Undermined by Inaction and Inadequate Funding. 19 PLOS ONE, October 12, 2022.
60
Bean, M.J. and Rowland M.J. (1997). The Evolution of National Wildlife Law: 198-200. Congressional
Research Service, The Endangered Species Act: Overview and Implementation. The Endangered Species
Act of 1973 (ESA; P.L. 93-205, 87 Stat. 884, 16 U.S.C. §§1531-1544).
61
Adler, J.H. (2024). Tarnished Gold: The Endangered Species Act at 50 101, Forthcoming in Florida International
University Law Review, Case Research Paper Series in Legal Studies No 2023-11 (Rev. Jan. 2024). P. 9.

22
 Overall, economic impacts are not integral to policy as is the case with most
environmental legislation in Table 1. Indeed, in 1978 in Tennessee Valley Authority v. Hill the
U.S. Supreme Court held that the ESA explicitly placed species conservation above other social
goals when in conflict. The court held that “The plain intent of Congress in enacting this stature
was to halt and reverse the trend toward species extinction, whatever the cost.” [italics added]
(437 US 153, 184. 1978).
With political property and policy rent seeking it is difficult to answer the question of
how far restrictions on private resource use should go. For advocates, they should go far enough
to bring the target species back from the edge of extinction. The costs involved would be those
necessary to achieve the goal. For landowners regulated under the law, the costs they bear should
be paramount. There are no clear grounds for negotiation and compromise. As pointed out
below, differential incidents of costs undermine collective efforts at species protection and may
explain the ESA’s limited recovery results.
Although the ESA was not to consider economic costs in listings, some cost assessments
shifted sharply when they became politically significant, as with Congress’s overriding of delay
in construction of the Tellico Dam in Tennessee. There were litigated concerns about the
endangered snail darter.62 Congress responded in 1978 by amending the ESA to require
economic considerations in critical habitat declarations. 63 After the dam controversy, the snail
darter was found to have other populations; moved from being categorized as endangered to
threatened; and finally delisted as recovered in 2022.
A general neglect of costs can lead potentially to too much costly protection as Coase
warned. None of the examples of high costs necessarily are evidence that costs exceeded
benefits. The required cost/benefit assessments were not done.
The possibility of excessive regulation was illustrated by the dusty gopher frog (listed in
2001) case in 2018 (Weyerhaeuser Co. v. U.S. Fish and Wildlife Service).64 The FWS had

62
Construction was halted by the US Supreme Court in Tennessee Valley Authority v Hill (437 US. 153, 172-73,
1978).
63
See: Congressional discussion of the Tellico Dam controversy in A Legislative history of the Endangered Species
Act of 1973, as amended in 1976, 1977, 1978, 1979, and 1980: together with a section-by-section index / prepared
by the Congressional Research Service of the Library of Congress for the Committee on Environment and Public
Works, U.S. Senate
64
Congressional Research Service, Home is Where the Habitat is: Supreme Court Addresses Critical Habitat under
the Endangered Species Act December 19, 2018. The Supreme Court held that only actual habitat of an endangered
species could be designated as critical habitat under the Endangered Species Act (ESA). See also Wood, J. and

23
designated critical habitat for lands that the frog had not been found. The court ruled that the
action was unwarranted. Additionally, Auffhammer et al (2020) estimated that critical habitat
declaration under the ESA lowered vacant land values near the Bay Area of California by 48% to
78%. 65 Finally, the northern spotted owl’s 1990 listing in the Pacific Northwest led to reduced
logging in federal forests by 80%; the loss of 32,000 blue color jobs, 14% to 28% of timber
industry employment in the counties with northern spotted owl habitat, along with lower
property values and out-migration from lumbering communities. In the midst of ongoing conflict
between rural inhabitants and environmental groups, the owl’s population has continued to
decline in the face of habitat loss from wildfires and the intrusion of an aggressive competitor,
the barred owl.66
Figure 1 lists annual ESA endangered or threatened species listings, recoveries, and
extinctions from 1967-2024. Figure 2 reports cumulative data for listings, recoveries, and
extinctions. The axes in Figure 2 are differently enumerated to include the three measures.
Listings far exceed recoveries or extinctions. It is not obvious in the data that the law is a
success. Endangered or threatened species listings that trigger ESA land use controls continue to
rise. Recoveries so that species are removed from listings (and extinctions), however, are
comparatively slim. Only 3% of listed species have recovered. 67 While the ESA calls for
recovery, there are politically-controversial baselines for evaluation and reassessment. The law
does not require it, nor do the competing parties (conservationists and landowners) have an
incentive to provide a target that weighs expected benefits and costs.

Figure 1 Annual ESA Endangered or Threatened Listings, Recoveries, Extinctions

Watkins, T. (2021) “Critical Habitat’s ‘Private Land Problem’: Lessons from the Dusky Gopher
Frog,” Environmental Law Reporter 51, no. 7.
65
The Economic Impact of Critical-Habitat Designation: Evidence from Vacant-Land Transactions
Auffhammer, M., Duru, M., Rubin, E., and Sunding, D.L. (2020).Land Economics, 96 (2) 188-206.
66
Ferris, A.E. and Frank, E.G (2021) “Labor Market Impacts of Land Protection: The Northern Spotted
Owl,” Journal of Environmental Economics and Management, 109:102480 (2021). See also “Endangered and
Threatened Wildlife and Plants; 12-Month Finding for the Northern Spotted Owl,” 85 Fed. Reg. 81144, 81152
(December 15, 2020).
67
A Field Guide for Wildlife Recovery: The Endangered Species Act's Elusive Search to Recover Species—and
What to Do About It. Downey, H., Priest, J., Regan, S., Watkins, T., Wood, J., and Yablonski, M. Property and
Environment research Center. September 20, 2023.

24
 Source: US Fish and Wildlife Service, ECOS dataset.

Figure 2: Cumulative ESA Listings, Recoveries, Extinction 1967-2024.

Source: US Fish and Wildlife Service, ECOS dataset.

The ESA directs the administering agencies, primarily the FWS, to develop and maintain
a list of species designated as endangered or threatened. Listing is to be based upon biological
evidence that a species is in danger of extinction. Once listed, it becomes illegal for anyone to
take that species, where take is defined as “to harass, harm, pursue, hunt, shoot, wound, kill, trap,

25
capture, or collect” a member of the species. 68 Listing can bring restrictions on how private and
government land can be used. Critical habitat designation also can trigger a variety of property
regulations, permitting delays, and environmental impact studies. There are winners and losers
in the process. With much at stake interest groups lobby Congress and the FWS for listings or
their delay (Ando 1999, 2001, 2003). 69 These groups include, versus environmental NGOs.
The political process is complex, as it is with most environmental legislation in Table 1
where there is a mix of public and private goods provided that is difficult for citizens to
disentangle. Political property recipients have little incentive to provide information on the
relative benefits or overall costs and benefits.
This setting may explain the ESA’s continuation with apparent limited budgets and
without congressional reauthorization. On the one hand, the ESA has been broadly popular. ESA
regulatory costs are spread across all citizens so that individual shares are small. Moreover, the
attraction of saving species is appealing so that the law retains overall support. Citizen
assessment of its general benefits, costs, and performance would be very problematic.
Citizens lack the relevant information, and competition among more directly affected
interest groups likely generates biased views that are difficult to balance. Land owner
associations, economic development groups, firms, and labor unions, representing regulated
parties, release information on local costs, but these can be interpreted as narrow concerns.
Environmental NGOs, however, release information about broad ecosystem benefits that can be
interpreted as public goods.
Because members of environmental NGOs primarily bear only direct lobby costs, they
can seek listings that might not pass any ex-ante cost/benefit calculus. They may have strong
personal preferences for species protection and for shielding the lands upon which the species
depends for aesthetic, recreational, or moral reasons (Ando 2003). But because they do not have
to pay for these environmental benefits, there is no reason for them to be constrained by
balancing marginal social and private costs in listings as a theoretical Pigouvian approach would

68
Ando (2003, 148). Do interest groups compete? An application to endangered species. Public Choice 114: 137–
159
69
Ando, A.W. (1999) Waiting to Be Protected Under the Endangered Species Act: The Political Economy of
Regulatory Delay. The Journal of Law and Economics 42 (1): 29-60; (2001). Economies of scope in endangered-
species protection: Evidence from interest-group behavior. Journal of Environmental Economics and Management
41: 312– 332; and (2003) Do interest groups compete? An application to endangered species. Public Choice 114:
137–159.

26
imply. Similarly, because landowner groups confront immediate, uncompensated private costs
while internalizing only small portions of any public goods generated, they have an incentive for
under provision in listings. Absent information on relative costs and benefits there are no
benchmarks for citizen assessments.
It also seems plausible that differences in collective action costs affect the effectiveness
of environmental groups versus land owners in lobbying politicians. Environmental groups can
rally around shared ecosystem and species concerns. There does not seem to be statistical
analyses of environmental group membership characteristics or how they benefit from policy
successes in greater donations or affiliations. What evidence on membership exists suggests that
they have higher income and education levels than the broad electorate. 70 These factors would
lower collective action costs. By contrast, the composition of landowner groups, urban
development associations, and labor unions would be more heterogeneous because of the local
nature of imposed costs, raising the costs of collective action.
Ando’s (1999, 39) analysis of lobbying for listings or their delay focuses upon members
on reauthorizing subcommittees in Congress who have significant influence on the FWS. She
suggests that politicians self-select to serve on such committees based on their constituent
preferences. This setting may be more effective for environmental NGOs with more uniform,
homogeneous objectives for the ESA than for more heterogeneous landowner groups whose
congressional representatives may face a broader array of economic demands beyond those
associated with the law.
In her analysis (1999, 47-53) of ESA listings in 1989, 1990, 1993, and 1994, Ando finds
that oversite committee members responded to petitions from relevant environmental or
landowner constituencies. Species promoted by congressional representatives with
environmental group residents were listed more quickly, while species opposed by
representatives with landowner residents faced listing delays. When there were competing
petitions to multiple committee members, pro-listing advocates typically prevailed. Ando
concludes that the patterns of interest group lobbying likely are found in other environmental
policies.

70
There seemingly is little information in the literature on membership characteristics and financial support of
environmental organizations. https://www.sierraclub.org/california/about-us.

27
 In a related study Ando (2003) examines interest group comments to 172 proposed
listings between 1989 and 1994. She does not find that competitive interest group lobbying led to
an efficient balancing of costs and benefits as hypothesized by Becker (1983, 396). Rather
groups were concerned about narrow net returns as they advocated or opposed FWS listings. 71
This finding is consistent with Coase’s warning of potentially undue Pigouvian restrictions.
In addition to lobbying, litigation also forces listings by the FWS. Langpap (2022)
analyzes litigation by environmental NGOs to compel listing, critical habitat designation, and
funding for imperiled species.72 Such organizations file hundreds of law suits, and he finds that
litigation accelerates or expands listings, critical habitat designation and size, as well as
expenditures for targeted species.73 Because budgets are constrained, outlays are aimed at
politically-important species (Ferraro et al 2007). 74 Although listing and increased species-
specific expenditures can bring status improvement, it may have adverse consequences by
signaling landowners of forthcoming agency action. Ferraro et al (2007) suggest that devoting
FWS budgets to the contentious process of listing may be less effective than focusing on
recovery. For litigants and lobbyists, however, listing is a primary objective.
Because two-thirds or more of endangered or threatened species are found on private
land, the effectiveness of the ESA in achieving its recovery goals depends upon cooperation with
private land owners.75 ESA’s Pigouvian approach provides few incentives for active private
stewardship of endangered species habitat. Listing and designation of critical habitat can place

71
Becker, G. (1983). A theory of competition among pressure groups for political influence. Quarterly Journal of
Economics 98: 371–400.
72
Langpap, C. (2022) Interest Groups, Litigation, and Agency Decisions: Evidence from the Endangered Species
Act Journal of the Association of Environmental and Resource Economists 9 (1). 1-26. Langpap points out that law
suits have grown dramatically over 1990-2016, the period examined. See also Langpap, C., Kerkvliet, J., and
Shogren, J.F. (2018). The economics of the U.S. Endangered Species Act: A review of recent developments. Review
of Environmental Economics and Policy 12 (1): 69–91 and Langpap, C. and Shimshack. J.P. (2010). Private citizen
suits and public enforcement: Substitutes or complements? Journal of Environmental Economics and Management
59 (3): 235–49.
73
Kerkvliet, J. and Langpap, C. (2007): “Learning from Endangered and Threatened Species Recovery Programs: A
Case Study Using U.S. Endangered Species Act Recovery Scores,” Ecological Economics 63: 499.
74
Ferraro, P.J., McIntosh, C., and Ospina, M. (2007) “The Effectiveness of the U.S. Endangered Species Act: An
Econometric Analysis Using Matching Methods” Journal of Environmental Economics and Management 54: 245.
246.
75
Adler, J.H. (2024). Tarnished Gold: The Endangered Species Act at 50 101, Forthcoming in Florida International
University Law Review, Case Research Paper Series in Legal Studies No 2023-11 (Rev. Jan. 2024) 29-38.

28
landowners at risk of lower land values and use options. Listing has led to documented declines
in farm land values and employment in affected counties. 76
As a result, landowners are motivated to engage in preemptive harvests or other practices
detrimental to critical habitat to reduce the risk of ESA controls. Further, the law discourages
information sharing about the location, number, and state of endangered species on their
properties or leased areas by land owners or permit holders. Doing so could invite the onslaught
of the law and its penalties.77
Lueck and Michael (2003) and Zhang (2004) find potential negative effects on the target
species.78 They examine the proximity of endangered red cockaded woodpecker nesting areas in
North and South Carolina in encouraging economically-premature timber harvests on private
lands. The harvests eliminate old-growth timber stands as potential habitat for the woodpecker.
Providing habitat for a single woodpecker colony could cost up to $200,000 in foregone timber
sales.
Lueck and Michael estimate that the observed private reduction in habitat led to the
potential loss of between 21 and 67 red cockaded nesting colonies, close to the estimated 84
private-land colonies already protected by the ESA. Zhang (2004, 160) found that the ESA made
land owners 25% more likely to harvest forest if endangered red cockaded woodpeckers nested
within a mile of their properties.
Political property or rent seeking under the ESA allows advocates to achieve desired
policy goals without changing personal behavior or bearing financial consequences. They can
lead policy to save species, with costs primarily those of organizing, lobbying, political
donations, and litigation to ensure regulatory agency compliance. Landowners bear direct costs.
Broader ESA costs and benefits are not advertised to voters. Indeed, as argued by Wyman (2008,
510) direct compensatory payment to landholders would have made the costs of the ESA larger
and far more observable. Moreover, because costs would have to be weighed across alternatives,

76
Melstrom, R.T. (2020). The Effect of Land Use Restrictions Protecting Endangered Species on Agricultural Land
Values. American journal of agricultural economics 103 162 and Melstrom, R.T., Lee, K., and Byl, J. (2018). Do
regulations to protect endangered species om private lands affect local employment? Evidence from the listing of the
lesser prairie chicken, Journal of agricultural and resource economics 43: 346.
77
Ando, A.W. and Langpap, C. (2018). The Economics of Species Conservation. Annual Review of Resource
Economics 10: 445.
78
Lueck, D. and Michael, J. “Preemptive Habitat Destruction Under the Endangered Species Act,” Journal of Law
& Economics 46, no. 27 (2003); The Journal of Law & Economics , Vol. 46, No. 1 (April 2003), pp. 27-60 Zhang,
D. (2004) “Endangered Species and Timber Harvesting: The Case of Red-Cockaded Woodpeckers,” Economic
Inquiry 32, no. 150-165.

29
focus might have been more on species where recovery was feasible and not on all at-risk species
as desired by conservation advocates. 79
What might have been a Coasean alternative? Although Ronald Coase did not address
problem of extinction, it certainly fit within the range of externalities of concern to him. If
private parties acted in ways that threatened the existence of some species, not weighing those
costs would result in excessive land-use practices. In such cases, those with economic property
rights would bear opportunity costs in failing to capitalize on the rising value of critical plants,
birds, and animals, as well as disregarding the impact of their land uses that was of concern to
others, who would be willing to pay them to adjust their practices.
In 1973 when the ESA was enacted, there was potential and precedent for Coasean
exchange. ESA precursors, the Endangered Species Preservation Act of 1966 (Pub. L. No. 89-
669, 80 Stat 926) and the Endangered Species Conservation Act of 1969 (Pub. L. No. 91-135, 83
Stat. 275) called for acquisition of land as habitat by expanding the National Wildlife Refuge
System. The 1969 law also authorized the Secretary of the Interior to develop a list of species or
subspecies of animals that were threatened with extinction. This list could have been a basis for
identifying key habitats for purchase. The widespread use of easements and land trusts for
voluntary, compensated conservation also was a roadmap (Farmer, et al 2011). 80
Moreover, private property rights to land existed for much of the country, where perhaps
most endangered species are found. This setting meant that exchange could take place, avoiding
the transaction costs and political property objectives encountered with fisheries in the
assignment of property rights.
With a Coasean approach, conservation would be a joint effort, not a Pigouvian-style
regulatory tax on one party. Both buyers and sellers would have a stake in the exchange and its
outcome. Endangered species could be assets and worthy of active protection efforts. Such
partnership could promote durable government or NGO funding as is required for long-term
recovery. Moreover, and perhaps even more fundamental, the requirement for trade would force
both parties to confront opportunity costs. Bargaining would balance marginal-willingness-to

79
Wyman, K.M. (2008, 510), Rethinking the ESA to Reflect Human Domination over Nature, 17 NYU
Environmental Law Journal: 490-528.
80
Farmer, J.R., Knapp, D., Meretsky, V.J., Chancellor, C., Fischer, B.C., (2011). Motivations influencing the
adoption of conservation easements. Conservation Biology 25(4): 827- 834. h

30
accept (value of foregone land uses or costs of other behavioral adjustments) and marginal-
willingness-to pay (value of protecting species). Marginal costs and benefits could be matched.
Importantly for social and political cohesion as well as long-term collaboration, the two
parties would not have to have the same species or ecosystem values. Conservation would not
be primarily a question of ethics or morality. Such concepts are very difficult to exchange or to
adjust in resource-use decisions, and they can be very socially and politically contentious. Even
with recognition of value judgements in avoiding extinction, such judgements will vary. While
some parties might be willing to bear serious costs, others might not. Coasean exchange would
be most useful when there were differences in views. Those differences would fuel trade.
A Coasean approach was not taken. Rent-seeking and political property via Pigouvian
mandates with no compensation to land users dominated the law’s development and
administration. No senator and only four members of the House of Representatives voted against
the bill in 1973. As noted by Doremus (2010): “Legislators appear to have regarded it as an
opportunity to deliver ringing rhetoric that would please the environmental movement without
facing any immediate political costs.”81
As structured, the ESA delivered government conservation mandates without significant
negotiation or direct compensatory payments. Affected landholders could not prevent a listing or
limits on their land uses and lower values once a species was declared endangered or threatened.
They could lobby or litigate, but not bargain to be fully compensated. For advocates political
property with directed rents was an attractive alternative to economic property rights and
markets. With a Coasean approach, costs and benefits would have been confronted more directly,
distributed more equally, and viewed more transparently by general citizens. Listings might
have been more directed to species with recovery potential and landowners would have had
greater motivation to join the preservation effort. The ESA might have been less divisive and
more successful.

VII. Concluding Remarks: The Differential Constraints for Institutional Innovation:

Williamson and Transaction Costs; Coase and Rent-Seeking and Political Property.

81
Holly Doremus, The Endangered Species Act: Static Law Meets Dynamic World, 32 WASH. UNIV. J.L. &
POL’Y 175, 177 (2010).

31
 The insights of Oliver Williamson (1975, 1985, 1996, 2010) and Coase (1937, 1992)
gave us an understanding of how agents responded to transaction costs and achieved greater
efficiencies through institutional innovation. Firm size, internal production and management
hierarchies, governance structures, contracting within and beyond firm boundaries, and relational
contracts could be seen as rational reactions to changing cost/benefit settings. New information,
new technologies, new production types and organization unleashed potential transaction costs
that required organizational responses. Transaction cost economics explained efficient
adaptation.
Williamson’s work, in particular, informed anti-trust rules and firm management
strategies. It was pivotal in shifting from strict per se to the rule of reason by the Department of
Justice and the FTC. While government decisions to litigate firm size and market behavior
shifted back and forth, depending on the political persuasion of each administration, the rule of
reason approach persisted. Williamson’s insights also explained corporate structures and
governance, as well as the impact of team production and technological innovation, the use of
supervisory boards, and evaluation of competing claims across various stakeholders.
Coase (1960) primarily had a policy, not organizational agenda. In The Problem of Social
Cost, he criticized standard Pigouvian approaches for addressing environmental externalities.
Rather than costly government intervention, he called for the assignment of property rights and
market bargaining to more efficiently confront externality. As with Williamson and Demsetz, he
recognized that transaction costs would affect the allocation of property rights and the extent of
exchange. Even so, Coase asserted that institutional comparisons were required to determine the
welfare advantages of Coasean approaches relative to Pigouvian regulation. He did not explore
the political policy process or how it might affect adoption of his recommendations. Yet, it has
been fundamental both in externality responses and welfare.
Although Coase’s 1960 paper is among the most cited in economics, his institutional
remedies have not been adopted in major US environmental policies. Coasean property rights
and bargaining are not the primary remedies in any legislation. All are Pigouvian. Subsequent
use of property rights and exchange has occurred in some cases, but it is late and limited, and
occurs around the edges of primary policy programs. The efficiency advantages, economic
welfare gains, and collaborate responses externality suggested by Coase have not been achieved.

32
 The apparent reason is the desire and ability of interest groups, politicians, and agency
officials to advance their self-interests through rent-seeking and political property, rather than
through economic property rights and exchange. They capture resource rents via desired policies
or preferential, non-tradable property rights, at comparatively lower direct costs than a market
approach would entail. Politicians and agency officials can secure reelection and regulatory
mandates and budgets. Overall policy benefits likely are less and aggregate costs more than
would have been possible had Coasean approaches been adopted.

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