Lecture 13

Lecture 13 - 10/24/10 Exams were returned at the end of...

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10/24/10 1 Lecture 13 Coase Theorem Using taxes and subsidies to correct market failures due to externalities Tragedy of the Commons Exams were returned at the end of class Friday Rough grading scale for first exam: • A: 81-100 • B: 69-80 • C: 47-68 • D: 40-46 • F: below 40 • average score on first exam: 71 Chapter 11: Externalities and Property Rights A. External costs B. External benefits C. Negotiation and the Coase Theorem 1. Negotiation and negative externalities Abercrombie the Polluter – Scenario 1 • Abercrombie’s company dumps toxic waste in the river – Fitch cannot fish the river – No one else is harmed • Abercrombie could install a filter to remove the harm to Fitch – Filter imposes costs on Abercrombie – Filter benefits Fitch • Parties do not communicate or negotiate Abercrombie's Filter Options With Filter Without Filter Abercrombie's Gains $100 / day $130 / day Fitch's Gains $100 / day $50 / day Total Gains $200 / day $180 / day Abercrombie does not install the filter Marginal cost of filter to Abercrombie is $30 per day The marginal benefit to Fitch is $50 per day There is a net welfare loss of $20 per day Abercrombie the Polluter – Scenario 2 • Negotiation changes the outcome – Suppose Fitch pays Abercrombie $40 per day to use the filter – With filter, Abercrombie pays $30 for filter but gets $40 from Fitch, better off by $10 – With filter, Fitch pays $40 to Abercrombie but gets $50 more fish, better off by $10
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10/24/10 2 Abercrombie the Polluter – Scenario 2 • Negotiation changes the outcome With Filter Without Filter Abercrombie's Gains $140 / day $130 / day Fitch's Gains $60 / day $50 / day Total Gains $200 / day $180 / day Coase Theorem: If people can negotiate with each other at no cost for side payments for externalities, the socially efficient outcome would emerge Ronald Coase The Coase Theorem – Negotiations must be costless • Sometimes those harmed pay to stop pollution – (as in Scenario 2) • Can also set up the law so that the polluter ends up bearing the cost (Scenario 3) Abercrombie the Polluter – Scenario 3 • Abercrombie’s company produces toxic waste – Suppose laws prohibit dumping the waste in the river
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Lecture 13 - 10/24/10 Exams were returned at the end of...

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