ECO101H1 Lecture Notes - Externality, Perfect Competition, Allocative Efficiency

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23 Jan 2011
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- very special circumstances where we dont need government to intervene to achieve allocative efficiency. Option to negotiate, regular people will find a way to get rid of the externality. If: - property rights exist (a way to defend the negotiation); Then: private markets, in the presence of externalities, can arrive at allocatively efficient outcomes. - further: result does not depend on who owns the property rights. - negative externality: cattle stray and damage crops. - apply the coase theorem: property rights exist exclusive right to use the resource (land);, low transaction cost: negotiation is easy; speak same language; farms are in walking distance; - result: negotiation between the two farms will reach efficient outcome. - initial distribution of property rights does not matter: - cattle can stray with no damage payable; - b now has two choice: loosing ,000 damage; or build the fence for ,000; - b must be compensated for crop damage;

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