ECON 201 Lecture Notes - Lecture 3: Coase Theorem, Ronald Coase, Pigovian Tax

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pinkturtle125

7 Dec 2016

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Document Summary

Ronald coase argued that private bargaining between parties can lead to efficient outcomes even when there is an externality: his theorem requires that the property rights of both parties be clearly defined. His theorem states that the amount of the good produced will always be the efficient amount: the property rights only determine the size of a payment of an outside good, such as money. Private bargaining is only feasible if transaction costs are small: an oil refinery that impacts every home in its vicinity is not going to make a deal with every single household. The property rights of all parties have to be fully specified: the government is still involved in this solution. Usually, the government has to step in to deal with externalities. In the noise example, dorm room could set a rule that no one can play their radio more than five hours.

Related Questions

40. According to the article by Timothy Lee in the Washington Post, Ronald Coase (a) Thought that people can always bargain between themselves without cost. (b) Believed that there is no role for the government in helping society to solve the problems associ- ated with externalities. (c) Believed that private parties can always bargain between themselves to solve externality problems. (d) Developed the Coase Theorem to illustrate the important role of bargaining (or transactions) costs in preventing private solutions to externality problems.

Question 1

An externality

		enhances market efficiency.
		is a private cost or benefit that results from the production or consumption of a good or service that is external to a market.
		is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.
		refers to production or consumption that occurs outdoors.

5 points

Question 2

Externalities can be produced by:

		the high price of goods and services
		individuals; firms
		market prices; market incomes
		oceans; streams

5 points

Question 3

When an external cost exists that is NOT taken into account in the production of a product,

		the level of output is too high, and the supply curve should shift to the left to account for the externality.
		the price of the product is too high, and production should be expanded to lower the price.
		the level of output is optimal, and there should be no change in the supply curve.
		the level of output is too low, and the supply curve should shift to the right to account for the externality.

5 points

Question 4

Which of the following is correct?

		MSC = MPC - MD
		MPC = MSC + MD
		MSC = MPC + MD
		MD = MSC + MPC

5 points

Question 5

If external costs (costs of cleaning up) are included and added to a firm's private costs, then

		the demand curve will shift to the left.
		the supply curve will shift to the right.
		the demand curve will shift to the right
		the supply curve will shift to the left.

5 points

Question 6

The Coase Theorem states that

		government intervention is always needed if externalities are present.
		assigning property rights is the only thing the government should do in a market economy.
		if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities.
		a free-market equilibrium is the best solution to address externalities.

5 points

Question 7

Buffalo in the United States almost became extinct while cattle, an animal that provides similar products, never have been close to extinction. The difference is due to

		the use of private property rights on cattle and common property rights on buffalo.
		the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo.
		cattle existing in Europe also while buffalo were specific to North America.
		the greater marginal value of a buffalo relative to a steer, leading to the overharvesting of buffalo.

5 points

Question 8

In theory, the Emissions Fee would

		cause firms to generate less pollution than their allowed limits.
		raise the production costs of all firms.
		cause firms to generate more pollution than their allowed limits.
		lower the production costs of all firms.