IMCH16new07

# IMCH16new07 - Chapter 16 Externalities Property Rights and...

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Chapter 16 Externalities, Property Rights, and the Coase Theorem Chapter Summary Chapter 16 focuses on externalities, including an extensive discussion of the Coase theorem. It begins with a definition of externalities presented from an example originally provided by Coase: a candy manufacturer produces noise which disturbs a neighboring doctor. The text demonstrates that without transaction costs, any allocation of liability will lead to an efficient outcome. From here the chapter extends the model to the case where transactions costs are positive. In this case "the most efficient legal and social institutions are the ones that place the burden of adjustment on those who can accomplish it at least cost." The remainder of the chapter covers property rights, positional externalities and taxation of externalities. Chapter Outline Chapter Preview The Reciprocal Nature of Externalities Property Rights Externalities, Efficiency, and Free Speech Smoking Rules, Public and Private Positive Externalities Positional Externalities Taxing Externalities Summary Teaching Suggestions 1. The Coase theorem can be illustrated well two ways. The text uses a chart of numbers to illustrate the various costs and benefits of a confectioner and a doctor. A second approach to the concept would be to use a graph that shows the costs and benefits of various actions. Suppose the problem is the stereo noise in the dorm. On the graph below the amplifier dial numbers are located on the horizontal axis. The vertical axis measures the costs and benefits of various levels of music (noise). Also measured on the vertical axis is the cost of insulating the walls to prevent the externalities from penetrating the wall. Costs & Benefits MC of her hearing your music Marginal benefit of playing music to you MC of her insulating MC of you insulating 0 1 2 3 4 5 6 7 8 9 10 Now a series of questions can be posed.

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187 CHAPTER 16: Externalities, property rights, and the Coase theorem a. If negotiation costs are zero and you have the property rights to the airwaves, how loud will the music be played? Since she will pay you to insulate your walls, you will play up to 5, but after that she need only pay you to compensate for your rather low cost of having no louder music. b. If negotiation costs are zero and she has the property rights to the airwaves, how loud will the music be played? Since you will now insulate to where your marginal benefit of music equals the marginal cost of insulating, you again play at 5. c. What if negotiation is impossible and you have the rights to play? Then you will play at 10 and she will have to pay to insulate herself. d. If she has the property rights under conditions of (c) above, then you will play at 5 again since you will insulate yourself and play to that level. This illustrates the second part of the Coase theorem. e. What happens if the airwave rights are auctioned off? She will outbid you all the way to
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## This note was uploaded on 09/16/2011 for the course ECON/ACCOU 101 taught by Professor Jang,hajoon during the Spring '11 term at Korea University.

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IMCH16new07 - Chapter 16 Externalities Property Rights and...

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