Chapter06

Chapter06 - Chapter 6 Property Rights and Political Economy...

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1 Chapter 6 Property Rights and Political Economy Contents: General Overview Legal Aspects of Environmental Policy & Coase Theorem Determination of Property Rights Allocation A Comparison of Alternative Legal Arrangements Economics of Environmental Restoration Uncertainty and Policy Choices Limited Information and Second-Best Policy Political Economy and Externality Policy General Overview Property Rights and The Coase Theorem : If property rights are well defined and transactions costs are very low, then it may be possible for the parties involved in an externality situation to reach an efficient solution by bargaining amongst themselves. The Economics of Environmental Restoration and Clean-Up: Given a limited amount of financial resources, it is important to determine the optimal amount of pollution to clean up. Uncertainty and the Weitzman Model : Uncertainty about the demand for environmental amenities and the costs of environmental protection may make standards preferable to taxes in certain situations. Limited Information and Second-Best Outcomes : A complete lack of knowledge of environmental costs or benefits will lead to the development of second-best sub- optimal policies. The Political Economy and Externality Policy Choice: Many special interest groups attempt to influence the formulation of regulatory policy through political contributions. The theory of political economy attempts to capture such notions as: • Regulators capture (regulators may be controlled by producer/consumer groups). • Rent-Seeking (special interest groups may seek to acquire the rents associated with certain regulations).
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2 Legal Aspects of Environmental Policy & Coase Theorem Property rights define entitlements which holders cannot be forced to give up. The notion is a legal definition. For example in a production externality situation such as water pollution: a chemical plant may have the property right to pollute a river. swimmers and bathers may have the property right to clean water. Coase Theorem : When property rights are clear and enforceable, when all economic agents have full information, and when transaction costs are low, there is no need for government intervention to correct externalities, because the economic agents can bargain to achieve a Pareto optimal allocation of resources. Further, the ability of economic agents to achieve the Pareto optimal allocation does not depend on which economic agent is given the property rights. For example: What the Coase Theorem has to say about the case of water pollution above is that government regulation is not necessary to achieve the social optimal level of water quality provided that someone owns the property right to all river resources. Even more surprisingly, the same optimal allocation of water quality, Q*, will be obtained regardless of whether the chemical plant or the swimmers are given ownership of the river.
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Chapter06 - Chapter 6 Property Rights and Political Economy...

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