141203W this section summary reviewed and sequence reposted Summarized from Greg Mankiw’s Principles of Economics PART 4 The Economics of the Public Sector Chapter 10 of 36 – Externalities section 14 … The Coase theorem states the private market in some cases can deal with externalities effectively • if private parties can bargain over the allocation of resources at no cost • the private market will solve the problem of externalities • and allocate resources efficiently Suppose Dick owns a dog “Bud” • Bud barks and disturbs neighbor Jane • Dick benefits from owning the dog • but it imposes a negative externality on Jane Two possible outcomes • Jane complains and Dick is forced to give up Bud • Jane continues to suffer from the noise of Buds barking A social planner, considering the two alternatives • would compare the benefit Dick gets from the dog to the cost Jane bears from the barking • if the benefit exceeds the cost it is efficient for Dick to keep the dog and Jane to endure the barking • if Jane’s cost exceeds Dick’s benefit he must get rid of the dog According to the Coase theorem, the private market will on its own reach the efficient outcome • Jane can offer to pay Dick to get rid of Bud, and refrain from keeping any noisy dog • Dick accepts the deal if the money offered is greater than his benefit of keeping a dog Suppose Dick gets a $500 benefit from the dog and Jane bears an $800 cost from the barking • Jane can offer Dick $600 to get rid of the dog, and Dick will accept • both parties are then better off, and an efficient outcome is reached It’s possible Jane would not be willing to offer any acceptable price to Dick. Suppose Dick gets a $1,000 benefit from the dog and Jane bears an $800 cost from the barking • Dick would turn down any offer below $1,000 • Jane would not offer any amount above $800 • Dick ends up keeping the dog • given these costs and benefits this outcome is efficient How different would the outcome be if Jane had the legal right to peace and quiet? According to the Coase theorem • the initial distribution of rights • does not matter for the markets ability to reach the efficient outcome Suppose Jane can legally compel Dick to get rid of the dog. Having this right works to Janes advantage, but it probably will not change the outcome. Here, Dick can offer to pay Jane to allow him to keep the dog • if the benefit of the dog to Dick exceeds the cost of the barking to Jane • then Dick and Jane will agree to a price Dick pays Jane for him to keep the dog Legal right effect determines who pays whom in the final bargain • whether Dick has the right to a barking dog • or Jane the right to peace and quiet In either case • the two parties can bargain with each other and solve the externality problem • Dick will keep the dog only if his benefit exceeds her cost The Coase theorem says • private economic actors can solve the problem of externalities among themselves • whatever the initial distribution of rights • the interested parties can always reach a bargain where everyone is better off • and the outcome is efficient … the free market will solve the problem 自由 市場 は 問題 を 解決 します じゆう いちば を もんだい を かいけつ します jiyū ichiba wa mondai o kaiketsu shimasu 解決 かいけつ resolution
Posted on: Wed, 03 Dec 2014 10:39:52 +0000
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