The voluntary approach to externality problems: A survey of the critics

The literature critical of the Coase Theorem is synthesized. One conclusion is that bilateral bargaining in a voluntary, frictionless setting results in optimality only by accident, if at all. This is because of the problem of threats and the problem of small numbers bargaining behavior (it is not marginal). The second conclusion is that the placement of liability in general affects the allocation of resources. The exception is when there are no income effects, no transactions costs, and no nonseparabilities. But the existence of externalities implies transaction costs are high, which in turn implies that liability matters.