To sum up The Coase theorem says that private economic actors can potentially

To sum up the coase theorem says that private

  • Notes
  • sendemailtoknow
  • 21
  • 82% (17) 14 out of 17 people found this document helpful

This preview shows page 17 - 19 out of 21 pages.

To sum up:  The Coase theorem says that private economic actors can potentially solve the 
Image of page 17
problem of externalities among themselves. Whatever the initial distribution of rights, the  interested parties can reach a bargain in which everyone is better off and the outcome is  efficient. 10-3c Why Private Solutions Do Not Always Work Despite the appealing logic of the Coase theorem, private individuals on their own  often fail to resolve the problems caused by externalities. The Coase theorem applies  only when the interested parties have no trouble reaching and enforcing an  agreement. In the real world, however, bargaining does not always work, even when a  mutually beneficial agreement is possible. Sometimes the interested parties fail to solve an externality problem because of  transaction costs  the costs that parties incur in the process of agreeing to and  following through on a bargain. In our example, imagine that Dick and Jane speak  different languages so that, to reach an agreement, they need to hire a translator. If  the benefit of solving the barking problem is less than the cost of the translator, Dick  and Jane might choose to leave the problem unsolved. In more realistic examples, the  transaction costs are the expenses not of translators but of the lawyers required to  draft and enforce contracts. At other times, bargaining simply breaks down. The recurrence of wars and labor  strikes shows that reaching agreement can be difficult and that failing to reach  agreement can be costly. The problem is often that each party tries to hold out for a  better deal. For example, suppose that Dick gets a $500 benefit from the dog, and  Jane bears an $800 cost from the barking. Although it is efficient for Jane to pay Dick  to get rid of the dog, there are many prices that could lead to this outcome. Dick might  demand $750, and Jane might offer only $550. As they haggle over the price, the  inefficient outcome with the barking dog persists. Reaching an efficient bargain is especially difficult when the number of interested  parties is large because coordinating everyone is costly. For example, consider a  factory that pollutes the water of a nearby lake. The pollution confers a negative  externality on the local fishermen. According to the Coase theorem, if the pollution is  inefficient, then the factory and the fishermen could reach a bargain in which the  fishermen pay the factory not to pollute. If there are many fishermen, however, trying  to coordinate them all to bargain with the factory may be almost impossible.
Image of page 18
Image of page 19

You've reached the end of your free preview.

Want to read all 21 pages?

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes