Samenvatting

In this paper we investigate the possible consequences of different institutional settings (in casu the legal system) on externalities and their effect on the efficient allocation of externalities. We investigate whether the restriction of marginally low transaction costs can be relaxed if the legal system is efficient. In this context we define an efficient legal system as a system of rules such that the Coase theorem can be applied in the presence of non-marginally low transaction costs without loosing its efficiency properties. The basic idea is that a legal system should be such that a potential plaintiff has no incentive to enforce the law by going to court. To analyze the consequences of different law systems, we split the paper into two parts. In the first part we start by summarizing the model of Schweizer (1988) on the Coase theorem as a kind of reference point. The advantage of Schweizer’s (1988) model is that his interpretation is seen as clear and thorough. Therefore, this model will be used to highlight the important properties of the Coase’s theorem.