Chap011.3 - Gains to Abe Gains to Fitch The Market(no...

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3 Chapter 11: Externalities and Property Rights Slide 13 External Costs and Benefits ± When a market leaves cash on table there is usually a response to capture the unrealized value. z Need well defined property rights Chapter 11: Externalities and Property Rights Slide 14 External Costs and Benefits ± River Pollution Abe’s company produces a toxic waste. z If the waste is dumped into the river, Fitch cannot fish the river. z Will Abe dump toxins in the river? z Should Abe install a filter? Chapter 11: Externalities and Property Rights Slide 15 External Costs and Benefits ± River Pollution z The Market ² There is no communication between Abe and Fitch ² Abe can legally pollute the river z What if Abe and Fitch can communicate? z What if Abe cannot legally pollute the river without Fitch’s consent? Chapter 11: Externalities and Property Rights Slide 16 Costs and Benefits of Eliminating Toxic Waste (Part 1) $50/day $100/day $130/day $100/day With filter Without filter
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Unformatted text preview: Gains to Abe Gains to Fitch The Market (no communication) • Without filter: Total Gains = $130 + $50 = $180 • With filter: Total Gains = $100 + $100 = $200 • MC of the filter = $30 & MB of the filter = $50 • Loss in economic surplus = $20 Chapter 11: Externalities and Property Rights Slide 17 $50/day $100/day $130/day $100/day With filter Without filter Gains to Abe Gains to Fitch Assume Fitch and Abe can communicate at no cost • Fitch offers Abe $40 to use the filter • Economic surplus increases by $20 Costs and Benefits of Eliminating Toxic Waste (Part 2) Chapter 11: Externalities and Property Rights Slide 18 External Costs and Benefits ± The Coase Theorem z If at no cost people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to problems caused by externalities....
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This note was uploaded on 02/20/2012 for the course ECON 202 taught by Professor Brightwell during the Spring '08 term at Texas A&M.

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