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Chapter 10-2.docx

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ECON 3220
Ali Kamar

Chapter 10-2 Property rights  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 o Exclusivity  All costs and benefits accrued to the owner o Transferability  Rights can be transferred by the owner o Enforceability  Rights cannot be encroached by others  If property rights are well-defined, then private market transactions can lead to socially efficient outcomes under some conditions o Summarized in the Coase Theorem  Coase Theorem o 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 Class exercise: Proof of Coase Theorem  A) Fishing has the right to clean water o Starting point at 0  Damage to fishing= 0  Abatement to paper mill 0E A o Consider moving to D  Damage to fishing = 0CD  Abatement cost to Paper mill = DBEM  Savings of TAC= OE A- DBE = OABD  OABD > OCD  SO if the paper mill compensates fishing slightly more than OCD, both parties are better off  So the move to D will take place  By the same logic, a movement from O to F or even to E* is welfare improving for both parties o B) Papermill has the right to use the river as a waste sink  Starting point is at E  Damage cost to fishery= OGEM  Abatements cost to paper mill= 0  Consider moving to K  Damage to fishery= OHK  Abatement cost to papermill= JKEM M M  Savings of TDE = OGE – OHK= HKE G  HKE G > JKE M o SO if the fishery compensates paper mill slights more then JKE both parties re better off o So the move to K will take place M o By the same logic a movement to from E to L or even H* is welfare improving for both parties Class exercise: Determining Social gains  Suppose a downstream Fishery is affected by the pollution dumped in the river by an upstream paper mill o (i) If the fishery has the right to clean water, the paper mill can offer fishery $300.tonne to accept E* amount of pollution ( up from 0.) o Determine the areas of gains and losses to each firm and in totoal fro this transaction  Fishery = TDC= D  Payment rom paper mill = C+D  Net gain(benefit) – C+D-D =C  Paper mill  TAC before (at 0) = B+C+D+J  TACH After (at E*) = J  Savings in TAC= B+C+D+J-J= B+C+D  Payment to fishery= C+D o SO net benefit to paper mill = B+C+D -(C+D)= B o Total gain from this transaction = C+B o (ii) If the paper mill has the right to use the river as its waste sink, the fishery can offer the paper mil $300.tonne to reduce pollution at E* (down from E )M o Determine the areas of gains and losses toe ach firm and in total from this transaction  Fishery = TDC= D+ J+K+H  At E* TDC= D  Gain or benefit for the fishery = D+J+K+H-D= J+K+H  Payment to papermill= J+K 
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