1 / 10

6. Absence of Property Rights

ECO324 Chapter 3—Modeling Market Failure. 6. Absence of Property Rights. The Coase Theorem Ronald Coase (1910-2013), Nobel Laureate, 1991. Ronald H. Coase: On Economics http://www.youtube.com/watch?v=04zFygmeCUA. Property Rights.

eugene
Download Presentation

6. Absence of Property Rights

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. ECO324 Chapter 3—Modeling Market Failure 6. Absence of Property Rights The Coase Theorem Ronald Coase (1910-2013), Nobel Laureate, 1991 Ronald H. Coase: On Economics http://www.youtube.com/watch?v=04zFygmeCUA

  2. Property Rights • Valid claims to a good or resource that permit the use and transfer of ownership through sale • For environmental goods, it’s unclear who “owns” rights • Economics says it’s the absence of rights that matters, not who possesses them

  3. Coase Theorem • Proper assignment of property rights, even if externalities are present, will allow bargaining between parties such that efficient solution results, regardless of who holds rights • Assumes costless transactions • Assumes damages are accessible and measurable In economics, a transaction cost is a cost incurred in making an economic exchange. It includes: search and information cost, bargaining cost, and enforcement cost.

  4. See Spot bark. The Coase Theorem: An Example Dick owns a dog named Spot. Negative externality: Spot’s barking disturbs Jane, Dick’s neighbor. The socially efficient outcome maximizes Dick’s + Jane’s well-being. • If Dick values having Spot more than Jane values peace & quiet, the dog should stay. Otherwise, the dog should go. Coase theorem: The private market will reach the efficient outcome on its own…

  5. The Coase Theorem: An Example • CASE 1: Dick has the right to keep Spot (Jane needs to pay Dick to get rid of Spot).Benefit to Dick of having Spot = $500Cost to Jane of Spot’s barking = $800 • Socially efficient outcome: Spot goes bye-bye. • Private outcome: Jane pays Dick $600 to get rid of Spot, both Jane and Dick are better off. • Private outcome = efficient outcome http://www.youtube.com/watch?v=zwwDkCylj2g

  6. The Coase Theorem: An Example • CASE 2: Dick has the right to keep Spot (Jane needs to pay Dick to get rid of Spot).Benefit to Dick of having Spot = $1000Cost to Jane of Spot’s barking = $800 • Socially efficient outcome: See Spot stay. • Private outcome: Jane not willing to pay more than $800, Dick not willing to accept less than $1000, so Spot stays. • Private outcome = efficient outcome

  7. The Coase Theorem: An Example • CASE 3: Jane has the legal right to peace & quiet (Dick needs to pay Jane to keep Spot). Benefit to Dick of having Spot = $500Cost to Jane of Spot’s barking = $800 • Socially efficient outcome: Spot goes bye-bye. • Private outcome: Dick not willing to pay more than $500, Jane not willing to accept less than $800, so Spot goes bye-bye. • Private outcome = efficient outcome

  8. The Coase Theorem: An Example • CASE 4: Jane has the legal right to peace & quiet (Dick needs to pay Jane to keep Spot). Benefit to Dick of having Spot = $1000Cost to Jane of Spot’s barking = $800 • Socially efficient outcome: Spot stays. • Private outcome: Dick pays Jane $900 to keep Spot, both Jane and Dick are better off. • Private outcome = efficient outcome

  9. The private market achieves the efficient outcome regardless of the initial distribution of rights.

  10. Solution to ExternalitiesGovernment Intervention • Internalize externality by: • Assigning property rights, OR • Setting policy prescription, such as: • Set standards on pollution allowed • Tax polluter (= MEC at QE) • Establish a market and price for pollution a private solution public solutions Ch4 Ch5 Ch5

More Related