23 The Significance of Coase’s Theorem The efficient mix of output will result simply as a consequence of the establishment of exchangeable property rights. It makes no difference which party is assigned the right to use a resource. If the transactions costs of exchanging the rights are zero, the efficient mix of outputs among competing uses of the resource will emerge.
24 Figure 3.7 Coase’s Theorem P W P B B A Price of Beef (Dollars) Price of Wheat (Dollars) Wheat Output per Year Beef Output per Year MC W MPC B Q W 1 Q B 1 MC W * MPC B + MEC = MSC Q W * Q B *
25 Limitations of Coase’s Theorem Transactions costs are not zero in many situations. However you allocate the property rights, the distribution of income is affected.
26 Applying Coase's Theorem The Clean Air Act of 1990 allows for the sale of the "right to pollute." Firms face a tradeoff when they pollute. If they pollute, they forgo the right to sell their emission permits to others. In markets for electricity, Clean Air Act has motivated firms to shift to natural gas and away from coal as a means of producing electricity.
27 Figure 3.8 Pollution Rights and Emissions S = Supply of Pollution Rights D = MSB of Emitting Wastes 100,000 Price and Marginal Social Benefit Tons of Annual Emissions and Number of Pollution Rights 0 $20 75,000
28 Figure 3.9 The Efficient Amount of Pollution Abatement MSB MSC E A* Marginal Social Cost and Benefit Percent Reduction in Waste Emitted per Year 0 100
29 Recycling Recycling may be a less efficient and more polluting use of labor, land and capital than simple land fill disposal because: Collecting waste for recycling costs three times as much as collecting it for disposal. Rural land is inexpensive.