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Unformatted text preview: 11-06-07 Econ Coace theorem: 1) Assume no t ransaction cost, fisher man own r iver a. Paper mill will have to pay fisherman for dumping waste in r iver. b. Paper mill has to take this cost into account when deciding how much to p roduce. [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 t ransaction cost but paper mill owns r iver (polluter owns r iver) a. Fisherman bribed producer not to dump waste [amount of bribe = m arginal external cost]. i. When paper mill calculates its cost, i t has to add the amount of this b ribe (it is amount of forgone bribe resulting from increasing output). b. Again Marginal private cost increase (move to the left) to coincide with M arginal social cost to new market equilibrium is at S (social optimum). Coase Theorem : In situation where property r ights are clearly defined and cost less t o enforce, bargaining among part icipants will lead to an economically efficient level of the externality. 1) Answer: solution to the externality problem (fisherman and paper mill merge [ paper mill buys fisherman]) a. Established property r ight as solution to extreme problem. b. Externality is internalities 2) Loss of fisherman is loss for paper mill. Policies to reduce pollution o o Pollution standards (not efficient producers that can more efficiently Pollution taxes [emission charges] Efficient way Get needs lot information to implement policy efficiently. Each fi rm will decide hold much population to reduce by setting. MC of decrease population = Marginal Benefit of decrease pollution (tax I am not paying) o Marketable permits efficient policy. Each them will include how much pollution to reduce by MC of pollution = MB of pollution ...
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This note was uploaded on 12/02/2009 for the course ECON econ taught by Professor For got during the Spring '09 term at UCSD.
- Spring '09
- for got