ECON 367 Lecture Notes - Lecture 4: Coase Theorem, Free Rider Problem, Allocative Efficiency
Document Summary
Externalities not necessarily inefficient: the hotel case for blocking sunlight, suppose allowing tower increases f"s profits by 20 and. E;s loss by 30: e will pay up to 30 and f will accept more than 20: suppose blocking tower increases f"s loss by 30 and. E"s profit by 20: f will pay up to 30 and e will accept more than 20. Initial assignment of property right irrelevant; mkt allocates the right to person who values it the most c. ii. Two implicit assumptions: no transaction costs : cost of using the price mechanism (oc) In sturges case, the cooperative surplu sid 30 and tc is much less than 30, but what is tc>30: high tc may prevent bargaining b, coase is operative if: net benefits from transactions > Production decision is the same; wealth is not: e. g. F and r: if r is liable, r;s wealth falls bc he must compensate crop loss.
