5 - I The Coase Theorem(continued Our discussion of the...

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I. The Coase Theorem (continued) Our discussion of the policy examples on the reading list suggested several limitations to the Coase Theorem. These included: 1. Costs of bargaining and transactions costs o Negotiation won't work when large numbers of people are involved, or when the victims aren't well defined (e.g. endangered species). o Similarly, different groups may have different bargaining power, affecting the distribution of the final outcome. 2. Need to be able to clearly establish who causes the harm. 3. Willingness to pay and willingness to accept are different. o Because of income effects, you may not be willing to pay as much to avoid damage as you would require in compensation to accept it. 4. Definition of property rights might affect the number of participants. o More people will come to the problem if they are likely to be compensated. 5. There is no guarantee that bargainers will reach an agreement. II. Liability Law An example of how the Coase Theorem applies to environmental policy is liability law. o If a firm will be held liable for the damages from its pollution, it has incentive to avoid pollution when the marginal abatement cost is less than the marginal damage. By avoiding damage, the firm lowers its liability. Note that the government does not need to know the marginal costs of the firm in order to achieve the desired level of pollution. Complications o The burden of proof may be difficult in court. Need to know both who causes the harm and what the damages are. o Will courts be willing to hold polluters liable for damages that they cannot pay? o Litigation is costly. III. Command and Control (CAC) Regulation Command and control regulation uses the setting of standards. o A standard is a mandated level of performance that is enforced in law. o A standard simply makes excessive amounts of pollution illegal. In principle, the government can set the standard to yield the efficient level of pollution control. IV. Types of Standards Ambient Standards o Regulates the amount of pollutant present in the surrounding (ambient) environment. o Examples: Parts per million (ppm) of dissolved oxygen in a river Sulfur dioxide (SO2) in an airshed Ground level ozone levels (ppm) o Measures are often an average (e.g. over a 24 hour period, or per year)
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This is important, as concentrations vary by time of day and by season (e.g. due to changes in weather) o Note that the level itself cannot be directly enforced.
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