1 / 18

Coase Theorem & Review of Regulation

ECON 100 Mar 9, 2009. Coase Theorem & Review of Regulation. Negative Externalities & Property Rights. “Common” Property Problem No one “owns” the air/water; therefore no one benefits from managing (pricing) its usage

woolley
Download Presentation

Coase Theorem & Review of Regulation

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. ECON 100 Mar 9, 2009 Coase Theorem& Review of Regulation

  2. Negative Externalities & Property Rights • “Common” Property Problem • No one “owns” the air/water; therefore no one benefits from managing (pricing) its usage • One solution is to assign the property right to one party and allow them to trade its use in the marketplace • Coase Theorem

  3. Problem of the Commons • An example from Fisheries • No one “owns” the fishery; therefore no one benefits from “economically” optimally managing its usage • Rivalry in consumption; but non-excludable resource • Solution is to assign/auction the property rights to catch “x” fish to one or more party (parities) and allow them to trade the permit in the marketplace • Coase Theorem solution

  4. Coase’s Theorem • If property rights exist and transaction (bargaining) and information costs are low • Then parties will be able to bargain among themselves (without government intervention) to obtain an efficient outcome

  5. An Example of the Coase Theorem • Marketplace • Firm upstream from a farmer • Firm produce a good valued by consumer but dumps pollutants into the river as a byproduct • Cost of using the river to the firm is $0 • Farmer • Downstream from the firm • Uses water to irrigate his agricultural products • Pollution affects/degrades his product

  6. Assigning the Property Rights • If assigned to the firm • Farmer is willing to “bribe” the firm to reduce pollution • Willing to pay firm to reduce gallons discharged up to marginal value of crop damage due to pollution • Firm: willing to accept payments that are >= marg costs of treatment/reduction

  7. Assigning Property Rights • Assigned to the Farmer • Firm is willing to pay farmer up to the marginal value of “avoided” treatment costs • Farmer is willing to accept payments >= marginal cost of crop damage • Either way: socially efficient (marginal value = marginal cost) solution • However, there are different income effect • Concluding which is best => normative statement

  8. Criticism of Coase’s Theorem • If more than 1 farmer • Transaction costs of getting all affected parties together may be too great to get to optimal solution if rights assigned to firm • Demsetz (1964): “when transaction costs are too high; status quo may be optimal” • Leffler: “if it exists, it’s optimal. But, why?” • Use of the government to lower transaction costs • Strategic behavior • Last individual may “hold” out (lower bribe/higher payment) as key to agreement • Fire protection example

  9. Tradable permits proposed to slow deforestation • Environmental groups are pushing for the use of market mechanisms to address one of the world's largest sources of greenhouse gas emissions: deforestation. • Similar to carbon trading, the CR plan would award tradable "credits" to countries that voluntarily reduce their deforestation rates below historical baseline levels • countries could then sell the credits to other nations that are unable to meet their emissions reduction goals. • To ensure the validity of countries' claims, compensation would be given only after a specific period of time and after sufficient satellite and on-the-ground observation. • According to Environmental Defense and its partner groups, the clearing and burning of tropical forests is responsible for as much as 25 percent of human-created GHG emissions. • South America's Amazon Forest alone holds some 60 gigatons of carbon • more carbon than all countries release from cars, power plants, and other human-related activities in a decade. • current rates of destruction, forest losses in Brazil and Indonesia alone will negate nearly 80 percent of the emissions reductions achieved under the Kyoto Protocol by 2012. • Slowing deforestation has the additional benefit of preserving biodiversity in threatened tropical forests, the groups note.

  10. Application to Fisheries • Fishing Industry • ITQs: Individual Transferable Quotas • Boats bid for the right/license to catch pre-determined amount of fish • Then can either use the license to catch fish; • or resell license to another boat • Boat owners will be willing to sell license if the price offered > profits from catch • Licenses will go to highest valued/most efficient use

  11. Fisheries • Other approaches • Quotas • Total catch for the fishery • Quota for each boat • Maximum Sustainable Yield (Biologists)

  12. Regulatory Effectiveness • What are the goals? • Allocative Efficiency • Marginal Value (benefits) to consumers = Marginal costs (including opportunity costs) of the resources used to produce the goods • Productive Efficiency • Firms produce at minimum costs • Technological Innovation • Other considerations • Administrative Costs • Dynamics

  13. Regulatory Effectiveness • Regulatory prohibitions • Prohibiting Anti-competitive behavior • Sherman Anti-trust Act, Clayton Act • Designed to prevent “monopoly-like” behavior • Should improve all 3 goals • But: • Lag behind what’s actually occurring in the marketplace • Depends on getting caught and convicted • Long judicial process

  14. Regulatory Effectiveness • Standards • Prohibit emissions/pollution beyond a “threshold” • Can be designed to get to “optimal” level of pollution • But: • Don’t change prices/costs in the marketplace • Don’t provide incentives for tech innovation • Don’t allocate quotas in a least cost manner • Not dynamic • High administrative costs (2x taxes admin costs)

  15. Regulatory Effectiveness • Incentive Mechanisms • Price caps, taxes and tradable permits • Taxes • Correct market signal -> raises costs -> raises price • Productive/allocative efficient; provides incentive for tech innovation (adopt least cost technology) • Administratively less costly than standards • Easier to adjust for dynamic/market changes than standards

  16. Regulatory Effectiveness • Price Caps • Provide “correct” price signal • Adjust for inflation and incentive to innovate from use of average industry productivity • Allocative/productive efficient • Administrative costs less than rate-of-return regulation • No incentive to “goldplate” costs (AJ Effect) • Fewer rate reviews/hearings

  17. Final Comments • Remember the goals • Economic efficiency • Low Administrative Costs • Flexibility to adjust • Competitively neutral • Simplicity • Sappington’s myths of deregulation

  18. Regulatory Effectiveness • Tradable Permits • Fisheries, pollution • License to catch “x” fish or emit “x” pollutants • Can be designed to attain “optimal” level of pollution/fish catch • Market Value of permit (resalable) ensures marginal benefit (keeping permit) = opportunity cost • Allocative/productive efficiency • Incentive to adopt cost-savings technology • May be better at adjusting to changes in the marketplace than taxes > standards

More Related