Externalities and the Coase Theorem: A Diagrammatic Presentation

In intermediate microeconomic textbooks the reciprocal nature of externalities is presented using numerical examples of costs and benefits. This treatment of the Coase theorem obscures the fact that externality costs and benefits are best understood as being on a continuum where costs vary with the degree of intensity of the externality. When these cost-and-benefit functions are portrayed as continuous, it is possible to analyze optimal levels...