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11-06-07 - Econ Coace theorem 1 Assume no t ransaction cost...

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11-06-07 Econ Coace theorem: 1) Assume no transaction cost, fisher man own river a. Paper mill will have to pay fisherman for dumping waste in river. b. Paper mill has to take this cost into account when deciding how much to produce. [externality will be internalities] c. Compensation to fisherman would be Marginal external cost because this is the measure of harm done to fisherman. 2) Assume no transaction cost but paper mill owns river (polluter owns river) a. Fisherman bribed producer not to dump waste [amount of bribe = marginal external cost]. i. When paper mill calculates its cost, it has to add the amount of this bribe (it is amount of forgone bribe resulting from increasing output). b. Again Marginal private cost increase (move to the left) to coincide with Marginal social cost to new market equilibrium is at S (social optimum). Coase Theorem : In situation where property rights are clearly defined
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