The core disagreement between Pigou, the profession, and Coase in the analyses of the externality question

The source of disagreement between Pigou, the profession, and Coase in regard to the externalities is thought to be transaction cost. Coase shows that the traditional prescription for remedying externality problems can be wrong if transaction cost is positive. But Pigou did recognize that positive transaction cost played a role in creating externality problems even though the profession later failed to do so. The present paper documents this, and it suggests instead that the core disagreement was in Pigou's willingness to rely on an omnicient State to implement policy and Coase's refusal to do so. In a comparison of these two views, Coase's zero transaction cost model plays a more important role than that commonly assigned it. JEL classification: D62; A10; B20; B31; Kll