Coase Theorem vs Pigouvian Tax

The Coase theorem holds that if property rights are clear and bargaining is costless, private parties can negotiate to fix externalities efficiently.

It implies government intervention may be unnecessary when transaction costs are low and rights are well defined. The efficient outcome is reached regardless of who initially holds the rights. In practice, high bargaining costs and many affected parties limit its use.

A Pigouvian tax is a tax on a good with a negative externality, set equal to the external cost to restore the efficient quantity.

By raising the producer's marginal private cost up to the marginal social cost, it internalizes the externality. The tax reduces output to the socially optimal level and eliminates deadweight loss. A carbon tax is a common example.