ECO320H1 Lecture Notes - Lecture 3: Coase Theorem, Pareto Efficiency
Document Summary
Converse to coase theorem: transaction costs represent a direct reduction of social surplus regardless of which party pays them, an inefficient technology (railroad spark arrestors, fences) may be more. Pareto optimal if transaction costs are high enough. Normative coase theorem: structure the law so as to remove the obstacles to private agreements. Normative hobbes theorem: structure the law so as to minimize the harm caused by failures in private agreements. A rule of possession encourages efficiency by emphasizing the production of wealth over the transfer of wealth. An alternative to the rule of first possession is the rule of tied ownership. Thieves and stolen property (pp 151 153) Ontario used to apply rule a, but now, the banks are liable. Joint ownership: joint owners are partners in a business or spouses in a marriage: each waits for the other to make the first move towards improvement, so neither moves. Each one believes the other free rides on the applied effort.