Abstract: The “Coase theorem" asserts that in the absence of transaction costs, parties to an externality will bargain to an efficient outcome. It also claims that the resulting level of externality-generating is independent of initial assignment of rights. It is well-known that Coase's second claim is true if utility is quasi-linear so that the valuation of externalities does not depend on wealth. This paper finds a class of preferences for which Coase's second claim is true when there are wealth effects. It presents a necessary and sufficient condition for Coase's second claim and discusses applications of this result.

Bio: I was born and raised on a Minnesota farm, about 25 miles north of Lake Woebegone.  Went to Carleton College in Northfield Minn, majored in math. (1957-1962),  My math teacher  at Carleton said there was such a thing as mathematical economics and that Arrow at Stanford would be a good person to study with. So I did that. (1962-1966).  My first job was at  Washington U St. Louis (1966-74), then  University of Michigan, (1975-96), now at UC Santa Barbara (1996-).