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18.1
someones behaviour increases or decreases anothers utility or profit, we say that the agent is imposing an externality (positive or negative) on the person affected. Property rights refer to the legally established titles to ownership, use and disposal of factors of production and goods and services.
18.2
2005 Pearson Education Canada Inc.
The Coase Theorem Part 1: When information is free, the allocation of resources is independent of the distribution of property rights, and the allocation is Pareto-optimal.
18.3
property consists of the ability to exercise choices freely. Transaction costs are the costs of establishing and maintaining property rights.
18.4
18.5
2005 Pearson Education Canada Inc.
farmer chooses the amount of grain to plant that maximizes his profits, assuming the rancher will run a given number of cattle. The rancher decides how many cattle to run to maximize his profits, assuming the farmer will plant a certain amount of grain.
18.6
farmer and a rancher can both make use the same land because there is no fence. The more cattle there are, the lower the profit of the farmer (cattle eat the farmers grain) and the more wheat that is grown, the higher the profits of the rancher (the cattle are well fed).
18.7
2005 Pearson Education Canada Inc.
18.8
18.9
18.10
Responses to Externalities
When
externalities are positive resources are underallocated. When externalities are negative, resources are overallocated. When there is an externality, there is always a opportunity to try and avoid it and increase the gains from trade.
18.11
18.12
2005 Pearson Education Canada Inc.
Responses to Externalities
With the assignment of property rights and no bargaining, the outcomes tend to be extreme and we end up with either too many or too few cattle. The assignment of property rights to the right party does not eliminate the externality but maximizes the gains from trade in light of the externality.
18.13
Responses to Externalities
The assignment of property rights is most effective when it is well known who commits the externality. In such cases the damages are well known and bargaining can take place. The assignment of property rights enhances the wealth of some parties while lowering that of others.
18.14
Responses to Externalities
Internalization is a process in which a third party, seeing an opportunity to make a private gain intervenes between the source(s) and the recipient(s) (Smoking/non-smoking hotel rooms). When problems are not privately resolved, governments may impose public regulation, based on cost-benefit analysis, or it may take no action at all.
18.15
18.16
Nonintervention
Because regulation itself uses up resources, including gathering information costs, administration and enforcement, the best policy may be to do nothing. Coase Theorem Part 2: When transaction costs are prohibitive, economic activities are organized to maximize gains from trade net of transaction costs.
18.17
2005 Pearson Education Canada Inc.
Public Goods
1.
2.
Public goods can be characterized by: Non-rivalrous-the good/service can be consumed by a number of persons simultaneously. Non-excludable-meaning that denial of access to the good or service is not possible or very costly.
18.18
that are both completely nonrivalrous and non-excludable are called pure public goods. They tend to be produced by some public authority rather than by profitseeking firms because firms find it costly to enforce contracts for nonexcludable goods.
18.19
2005 Pearson Education Canada Inc.
18.20
18.21
18.22
2005 Pearson Education Canada Inc.