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Unformatted text preview: Section Notes 3 Outline Announcements Coase Theorem Shadow Pricing Hetereogeneity and Tradable Permits Taxes, Standards and Heterogeneity Weitzman Model 1 Coase Theorem 3 Assumptions: Property Rights: Information: Transaction Costs: Result: Pareto Optimality, Distribution depends on a initial allocation rights political economy The Coase Theorem Applied to Pollution Rights Case 1: The chemical plant has the right to pollute (swimmers can pay chemical plant for reduction in pollution) 1 Initial Outcome After Negotiations Pollution 0A 0N Chemical plant surplus 0EA 0ECN+NCFA * Swimmer welfare CFM Social surplus 0EA 0ECN+NCMA *swimmers pay AF for each unit of pollution reduced (NCFA) Case 2: The swimmer have the right to clean water (chemical plant can compensate swimmers for pollution) Initial Outcome After Negotiations Pollution 0N Chemical plant surplus ETC Swimmer welfare 0MA NCMA+0TCN * Social surplus 0MA 0ECN+NCMA *chemical plant pays 0T for each unit of pollution allowed (0TCN) What assumptions of the Coase Theorem might fail easily? Should policy-makers focus on reducing trans- action costs or de ning property rights? 2 Shadow Prices What is a shadow price? Lecture notes say: bene ts lost when tightening a constraint . We can think of a shadow price as the value of being allowed to produce more or less pollution. We went through the graphical example in class, so now we will review a numerical example on calculating shadow values, or optimal tax levels with a pollution target 1. Firms are producing where MC=MB(MPB). Suppose that MB = 40-4Q and MC =8 . What is1....
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This note was uploaded on 09/24/2011 for the course ECON C125 taught by Professor Zelberman during the Spring '09 term at University of California, Berkeley.
- Spring '09