the coase theorem

# the coase theorem - 18b The Coase Theorem Example Lets Say...

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18b. The Coase Theorem Example: Lets Say a Steel Mill is producing smoke that is hurting the Laundry Business right next door to the steel mill. Assume that the smoke only hurts the laundry and no other individual or business. Assume that the damage to the Laundry is \$5 per ton of Steel produced. So the dispute is taken to Court: The judge has two possible decisions to make: 1) Steel Mill is Liable: Has to provide Clean Air to Laundry 2) Laundry is Liable: No right to clean air… smoke persists. Possible Outcomes for whoever is Liable and Cost (in \$ per ton of Steel produced) Steel Mill is Liable Laundry is Liable 1) Pay Laundry \$5/ton 1) Suffer with Smoke \$5/ton 2) Install Scrubber (air cleaner) \$8/ton 2) Pay Steel Mill for Scrubber \$8/ton 3) Steel Mill Moves \$10/ton 3) Pay for Steel Mill to Move \$10/ton 4) Pay Laundry to Move \$20/ton 4) Laundry Moves \$20/ton Note: Either way, if smoke persists or not, the cost is the same. So the cheapest option is chosen… which has cost of \$5/ton. Conclusion: Judge Does not Matter. Definition of Coase Theorem: Liability Doesn’t Matter. Real Life Scenario of Coase Theorem: You Have a Candy Maker Shop and Next to it A Doctor’s Office. ( See Figure 18.b.1 ) The Law allows the Candy Maker to Build the Shop Right on the Property Line. The Doctor has his Office a couple of feet away from the Property Line. The Doctor decides to expand his business by building a New Office, which will allow him to see more patients. The New Office is expanded to the property line. The New Office Will Generate an Additional \$30k/year for the Doctor.

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## This note was uploaded on 05/05/2010 for the course ECON 303 taught by Professor Cheng during the Spring '07 term at USC.

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the coase theorem - 18b The Coase Theorem Example Lets Say...

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