I had a question about 'classifying' solutions and about the Coase Theorem.
One way to think of solutions is technological vs. market solutions (of course we also spoke about social sanctions/norms and perhaps outright bans). Technological solutions generally reduce or clean-up emissions. Examples include: catalytic converters and scrubbers.
Market solutions seek to create markets. Markets do not exist because of property rights issues (“air” has public goods characteristics non-rival and non-excludable). Carbon markets create ‘permits’ which can be traded. Permit to do what? Pollute. But you have to pay to pollute (so you need to buy permits - and because they cost money - you will take the 'costs' of pollution in your decision making - or 'internalize' - same with carbon taxes)
The Coase Theorem is for ‘small-numbers’ problems – bargaining is costly when you have large numbers. Assignment of property rights – is important for the Coase Theorem (the lack of a no-smoking sign ‘gives the smoker the right to smoke’). Or if the assignment is ambiguous you could go to court and let a judge decide. But all the assignment of the property rights does - is that - it determines who pays whom. It has no impact on the outcome. The outcome will be what it will be and depends on how much the smoker values smoking and how much the non-smoker values smoke-free air.
If there is no ‘sign’ then the non-smoker pays the smoker to stop smoking. Suppose the value to the smoker of smoking is $10 and the value to the non-smoker of clean air is $20. Then a deal can be struck and the ‘price’ will lie between $10 and $20. The ‘efficient’ outcome will be that the smoker will stub out their cigarette.
But it the value to the smoker of smoking is $50 and the value to the non-smoker of clean air is $20. There will be no deal. The ‘efficient’ outcome will be that the smoker will continue smoking. Bargaining solutions depend on costs/benefits (max willingness to pay vs. minimum the other person is willing to accept)
Of course the Coase theorem has other assumptions (bargaining costs must be zero (or very low). If they are not then of course bargaining solutions won’t be feasible.
Another question about what should be included in transactions costs: Everything: time costs (search costs), legal costs, contracting, monitoring and bonding costs – bonding means making sure people stick to their bargain – or to the contract they signed.
The last question was about the river with a laundry upstream and a beer producer downstream - and I used the term vertical integration. The question was if this is an appropriate term. It could be because 'clean' water is an input for the beer producer and the laundry is polluting the water. But even if you don't want to think of this as a vertical relationship, it's fine. What it is - is joint profit maximization - that helps to 'internalize'. So either firm can buy up the other in order to get to that solution. Of course there could be other solutions - they could go to court. The beer producer could install a water filtration system - all depends on costs and benefits.