08. Coase's 'Theorem'

08. Coase's 'Theorem' - ECON 201 Shomu Banerjee NOTES ON...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON 201 Shomu Banerjee NOTES ON COASE’S “THEOREM” Ronald Coase won the 1991 Economics Nobel Prize "for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy". He’s probably best known for the so-called Coase “theorem” which he never formally stated but is generally interpreted as follows: The equilibrium level of an externality (e.g., pollution) is independent of the assignment of property rights (including the assignment of liability for damage) so long as there are no transactions cost or income effects. What Coase appears to be saying is that if a firm pollutes and causes harm on others, the equilibrium level of externality will be the same whether the firm has the right to pollute or whether the harmed people have the right to clean air or anything in between. In the following analysis, we study under what circumstances the level of externality will be independent of the assignment of property rights. Suppose A and B are roommates and there is a good x which both person A and B care about, and another good y (e.g., smoking) which A cares about but B does not. Suppose their utility functions are quasilinear given by u A ( x a , y ) = x a + f ( y ) and u B ( x b , y ) = x b - g ( y ). Note that y (the right to smoke) enters as a public ‘good’ for A and a ‘bad’ for B : there is no ‘ a ’ or ‘ b ’ superscript for this good because both consume the same level of this good. The indifference curves for
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.

Page1 / 4

08. Coase's 'Theorem' - ECON 201 Shomu Banerjee NOTES ON...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online