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Coase Theorem. Producer creates output Creates benefits “marginal” benefits (diminishing ) pollution. Building the graph . Producer creates output Creates benefits “marginal” benefits (diminishing ) pollution. Building the graph . Total Benefit to Company.
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Producer creates output Creates benefits “marginal” benefits (diminishing) pollution Building the graph
Producer creates output Creates benefits “marginal” benefits (diminishing) pollution Building the graph Total Benefit to Company
Building the graph, cont’d With pollution Community experiences Costs clean up health care lost tourism Total Costs to Community
“Optimal” solution (max social benefit) without actual transactions ?? Total Benefit to Company Total Costs to Community
@ 100 units pollution output/pollution benefits‹ Costs to community Net Social Gain “optimal” @ output producing 60 units of pollution MBcompany = MCcommunity “Optimal” amount of pollution “Equitable” to Both parties “Optimal” solution (max social benefit) without actual transactions ??
Case 1 Community owns “right” to determine how much pollution is permissible Begin with zero pollution Company would like to produce output & gain benefit. But, creates Pollution Coase Theorem says same “optimal” outcome obtained via market transactions Both parties benefit, thus, both agree “optimal” 60 reached via Market mechanism
Community has pollution costing $6000 (C) $12000 new income (B+C) Net Gain $6000 Company has Made pmts of $12000 (B+C) Gained benefits of $21000 (A+B+C) Net profit of $9000 (A) What has been achieved? Same “Optimal” result obtained via Market A = $9000 B = $6000 C = $6000
Begin with output that creates maximum benefits of $25,000(A+B+C+D) and creating 100 units pollution Community incurring costs of $17,000(C+D+E+F) Case 2Company owns “right” to determine how much pollution they make A = $9000 F=$3000 E = $4000 B = $6000 C = $6000 D=$4000
Community wants to reduce pollution Offers to make pmt of $200 unit to cutback output Case 2 Company owns “right”, Cont’d Both parties benefit, thus, both agree
Community has Eliminated $11,000 in pollution costs (D+E+F) Made pmts of $8,000 (D+E) Left with pollution costs of $6,000 Total Outlay (to get rid of all pollution)$14,000(C+D+E) vs,$17,000 What has been achieved? For community F=$3000 E= $4000 C = $6000 D=$4000
Company has Reduced output & pollution, giving up benefit of $4,000 (D) Received pmts of $8,000 (D+E) Retains existing benefit of $21,000 (A+B+C) Existing benefit plus pmts = Total Benefit $29,000(A+B+C+D+E) What has been achieved? For the company A = $9000 F=$3000 E= $4000 B = $6000 C = $6000 D=$4000
Company Holds Rights Text p53
Assumptions: Given distribution of wealth and income Complete Information No Transaction Costs Clear Property Rights Problems: Wealth Effect Free-Rider Hold-out Cost to Obtain Information Negotiation Costs Default Ownership ?? Coase Theorem All this in text book
@ output that emits 90 units of effluent “Optimal” solution for both parties without actual transactions
Case 2 Company owns “right” to determine how much pollution they make Begin with maximizing benefits of $25000 (A+B+C+D) and creating 100 units pollution Community incurring costs of $17000 (C+D+E+F) Coase Theorem says same “optimal” outcome obtained via market transactions
