Economics 3220 Lecture Notes - Free Rider Problem, Coase Theorem, Paper Mill
Document Summary
It is a legal entitlement that defines rights, privileges, responsibilities and limitations of owning a natural or environmental resource. A well defined property rights must have 3 conditions: exclusivity. All costs and benefits accrued to the owner: transferability. Rights can be transferred by the owner: enforceability. If property rights are well-defined, then private market transactions can lead to socially efficient outcomes under some conditions: summarized in the coase theorem. Coase theorem: if parties can bargain to negotiate without transaction costs, then a socially efficient equilibrium (of pollution externality) can be achieved regardless of which party owns the property rights. A) fishing has the right to clean water: starting point at 0. Abatement to paper mill 0ema: consider moving to d. Abatement cost to paper mill = dbem. Savings of tac= oema- dbem = oabd. So if the paper mill compensates fishing slightly more than ocd, both parties are better off. So the move to d will take place.
