...The Coase Theorem In “The Problem of Social Cost,” Ronald Coase introduced a different way of thinking about externalities, private property rights and government intervention. The student will briefly discuss how the Coase Theorem, as it would later become known, provides an alternative to government regulation and provision of services and the importance of private property in his theorem. In his book The Economics of Welfare, Arthur C. Pigou, a British economist, asserted that the existence of externalities, which are benefits conferred or costs imposed on others that are not taken into account by the person taking the action (innocent bystander?), is sufficient justification for government intervention. He advocated subsidies for activities that created positive externalities and, when negative externalities existed, he advocated a tax on such activities to discourage them. (The Concise, n.d.). He asserted that when negative externalities are present, which indicated a divergence between private cost and social cost, the government had a role to tax and/or regulate activities that caused the externality to align the private cost with the social cost (Djerdingen, 2003, p. 2). He advocated that government regulation can enhance efficiency because it can correct imperfections, called “market failures” (McTeer, n.d.). In contrast, Ronald Coase challenged the idea that the government had a role in taking action targeted at the person or persons who “caused”...
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...Micro Economy Externalities Elizabeth Turra Brouwer 11-1175 9/08/201 An Externality is when costs or benefits of certain activities spill or fall into third parties that have nothing to do with the initial situation in hand; its like a side effect or consequence of an activity that affects other parties who did not choose to incur that cost or benefit. Like you can see there can be either costs, or benefits that affect those third parties. When it is a cost that is imposed on third parties, it is called a negative externality; negative externalities occur when a decision or activity imposes costs on anyone that is not involved in the making of the decision, that is if a decision imposes any kind of external cost, which are costs you impose on others, then the social cost will exceed the private cost, which is the cost to the decision maker. On the other hand, when the third party benefits from an activity in which they are not directly involved, the benefit is called positive externality. Negative externalities occur in our every day life; you see, since humans are a very self centered specie we tend to think about the cost something would have on us and very rarely on what it would have on others. Even consumers do not take cost of externalities into account when buying a product that may have a negative externality. So, when a negative externality occurs in an unregulated market, producers don’t take responsibility for external costs, these costs are just...
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...Jason Alves May 4, 2015 Economics 102 Externalities In our economy, the government is always trying to improve the allocation of resources; one of the methods that improve the allocation of resources in our economy is the alteration of market failures that are caused by externalities. Externalities occur when an external source receives some of the costs of benefits of a certain good that the actual buyer or seller does not receive. There are two sides to externalities; there are both negative and positive externalities. First of all, a negative externality occurs when a decision made from a source (Individual or firm) does not have to pay the full amount of their decision. When talking about a good or a service that has a negative externality, the consumer is usually paying less than society. When a consumer makes a decision, typically they weight their marginal cost and benefit, but they do not weight the negative externality, which creates a huge disorganized market. As for the producer, they do not take the responsibility of external costs, so these costs are passed on to society. In addition, negative externalities occur everyday, from our jobs, homes and even children. In an article from BBC news, it explains the negative externalities that England received from smoke-free legislatures introduced. In the article it stated, “A study showed a 12% drop in the first year after the law to stop smoking in enclosed public places came into force. The authors say there...
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...Review of: David D. Freidman’s Law’s Order Chapters: 4. What’s Wrong With the World, Part 2 8. Games, Bargains, Bluffs, and Other Really Hard stuff 9. As Much as Your Life is Worth Abstract This book contains a different style of viewing not only the legal system through the eyes of an economist, but as some may take from it, different ways to perceive the interactions that are encountered daily in life. If there were only one human in the world, he/she could do as he/she pleased. As soon as there enter two, the questions of whose interests and exertions of those interests and how they interact with those of the others’ can cause results that were not always in the desired outcome of one or even both people. Therefore, how should these said interactions be handled? When is it necessary to bring laws into the dealings of any situation and to what degree? This book take on these questions and gives examples that can be interpreted in different ways to give a different view on how and why we may or may not need laws; while leaving enough room for the reader to make their own judgments. Chapter 4: What’s Wrong With the World Part 2. Nothing works Costs are produced by one person and borne by another. This simple statement is simply stating that costs’ are not made by only one person in any given situation. As in the example of the polluter and the person being affected by the pollution; there were choices on both parties to bear costs of being neighbors...
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...The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1991 Ronald H. Coase Ronald Harry Coase (/ˈkoʊz/; 29 December 1910 – 2 September 2013) was a British economist and author. He was the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took courses with Arnold Plant. He received the Nobel Prize in Economics in 1991. Coase, who believed economists should study real markets, not theoretical ones, established the case for the corporation as a means to pay the costs of operating a marketplace. Coase is best known for two articles in particular: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms, and "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities (see Coase theorem). Coase is also often referred to as the "father" of reform in the policy for allocation of the electromagnetic spectrum, based on his article "The Federal Communications Commission" (1959), where he criticises spectrum licensing, suggesting property rights as a more efficient method of allocating spectrum to users. Additionally, Coase's transaction costs approach is currently influential in modern organizational economics, where it was reintroduced by Oliver E. Williamson...
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...Ronald Coase: The Nature of the Firm In times of a lot of perfect competitive markets and a lot of transactions between firms in the b2b or b2c sector the term of transaction costs arises. First of all you have to define what transactions are: Transactions are the implicit and explicit contract negotiations for goods and services between at least 2 people. The transactions theory now tells us that there are costs for every step of these contract negotiations and also costs after the contract conclusion. Transaction costs could appear before (ex-ante) the contract conclusion and after (ex-post) the conclusion. Ex-Ante costs are Information-, Negotiation- or Contract costs. Ex-Posts costs are for example costs for monitoring the behavior of your contract member or you have to change something ex-post in the contract. The ex post costs are more important because experts consider that a lot of contracts have errors or are bad formulated and so these transactions costs arise for sure. During the past century, different economists had different approaches and conclusions about the theory of the firm and the importance of transaction costs. Alchian & Demsetz (1972) stated in their work, that there would be no substaintial difference between using the market or an organization for the allocation of resources, making firms seem useless. Ronald Coase opposed this view in 1937 in his famous work "The nature of the Firm". For Coase, the main reason for establishing a firm is...
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...Economics is a social science that studies how individuals, governments, firms interact in allocation of resource, distribution of resources and transaction in the market. Public finance is said to be the center of economics that studies government activities in the economics and how government finances their expenditure. The span of government activities in a country are capitalist in which government activities are narrow, socialist where government undertakes most government activities and mixed economy in which the government takes a larger share of the economics activity. Externalities occurs in a situation where the buyer and seller do not take into consideration the effect of their action on third party or where there is a spillover effect on production process, externalities also occur when the right to use of environment is in dispute which means there is a need for property right. Which is the law created for firms, individuals for the use of a resource. Whenever there is an externalities and inefficient allocation of resource by private sector then market has failed to achieve efficiency also If the environment is regarded as being of value why does it suffer abuse? When and how does use of environment become abuse? The simple answer is that these problems are examples of a combination of various aspects of what is commonly known as market failure. These include missing markets, externalities, common property and other related effects. we can say, absence of...
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...Principles Of Economics Strayer University ECON 100 March 12th 2012 Suggest how an economist would approach the problem of alcohol abuse. Provide two (2) possible solutions to this problem. Include the four (4) elements of the economic way of thinking in your analysis It is a real case of negative externalities both in consumption and production. production of alcohol causes pollution too. The two possible solutions suggested by economists are: Coase theorem-They can negotiate by themselves for compensation without any government intervention if the property rights are secured and the cost of negotiation is not high. Pigouvian- taxes or regulations. Drunk driving is included. An economist would increase cost through added tax and reduce availability. (answer.yahoo.com, 2012). When measuring the cost of alcohol abuse in any city in the U.S. we must understand what make the assumptions of alcohol abuse comprehensible and to focus on the relevant alcohol abuse. We have to think about such things as health services and medical expenses, premature death, loss of productivity, and alcohol related crimes. In total, the U.S. economy loses an estimated $185 billion each year to alcohol-related problems, according to the National Institute of Alcohol Abuse and Alcoholism. We use the assumptions to help explain, Economics is a discipline, but it is not an exact discipline. Economic theory simplifies situations because it would be nearly impossible to predict and...
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...Abstract This paper discussed and explained outsourcing, identified effective techniques and methods, and why outsourcing is utilized. Outsourcing can be an effective method for improving an organization’s functionality. While outsourcing advantages can reap benefits of improved productivity and lowered costs, the disadvantages must be taken in consideration to reach success. Analyzing the different aspects of: why is outsourcing necessary, what are the potential advantages and disadvantages, and is it cost effective upon a thorough review of the market and costs associated are essential. Outsourcing a Source with Strategic and Effective Techniques The ways in which business decisions take place are increasingly complex, costs are an important part of decisions, especially the make or buy decision that is important in determining if outsourcing of off shoring takes place. The majority of literature focuses on the production cost, but these are not the only costs that need to be considered, less visible, but just as important are the transaction costs, Jacobides and Winter (2005) argue that transaction costs can be just as important as production costs, and are key in the outsourcing decisions, Barney (1991) argues it is used in the way resource allocations is assessed. To consider this it is necessary to look at how transaction cost economics can be applied to business decisions and the way that outsourcing takes place. In order to examine this concept, and the way in which...
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...Assignment 1–Advanced Operations Research - MATH 3010 Posted 23 August 2014 Due date: 19 September 2014, by 5pm In all the statements below, the notation, as well as references to page numbers, equations, etc, are as in the textbook Primal-dual interior-point methods, by Wright, Stephen, which is available online for UniSA staff and students. All relevant chapters of the textbook are also available in the webpage of the course. For solving this assignment, you need to read the handwritten Lecture Notes posted in the web and the material in the book up to Chapter 4, page 70. Question 1 (2+2+3+3+3+3=16 points) Fix A ∈ Rm×n , b ∈ Rm , and c ∈ Rn . (a) Write down the KKT conditions for the following problem, on the variable x ∈ Rn : min cT x Ax = b ; x ≥ 0. (1) (b) Write down the KKT conditions for the following problem, on the variable (λ, s) ∈ Rm+n AT λ max λT b + s = c; s ≥ 0, (2) Show that both the KKT conditions associated with both problems are identical. (c) Given x, s ∈ Rn , define the matrices X = diag(x1 , . . . , xn ), S = diag(s1 , . . . , sn ), and the vector e = (1, . . . , 1)T ∈ Rn . Let F : R2n+m → R2n+m be defined as T A λ+s−c . Ax − b F (x, λ, s) = XS e Show that a solution of F (x, λ, s) = 0 does not necessarily satisfy the KKT conditions of part (a) (or part (b)). Prove that, on the other hand, every vector (x, λ, s) that satisfies the KKT conditions must satisty F (x, λ, s) = 0. (d) Recall that the search direction (∆x, ∆λ, ∆s) generated by a Newton...
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...Huawei boundaries through TCE approach History The history of Transactional Cost of Economics (TCE) has its roots somewhere during the second world’s war, when Coase (1937) was trying to find some practical explanations related to the economic theory existing at that time. The differences between the perception of a firm or company and its correspondence in the real world have been assessed, making an empirical analysis of possible attributes that can influence their development in close relation to its internal factors and, and the market interactions as well. Following Coase’s study “The Nature of The Firm”, many other economic papers and theories have emerged in the next decades, leading to the development of different concepts like TCE, vertical boundaries of a company, interactions between company and market and optimal decision for the “make or buy” dilemma as it is mentioned also by (Lafontaine and Slade 2007). Contributions of Coase and Williamson The basics for TCE development have been defined by Coase (1937), making an argumentation in favor of lower possible cost of assessing some activities within a company rather than acquiring them from the market by a set of more costly transaction. Also, he has argued that preferential treatments a firm can get from external environments (like governments), combined with the possibility of reducing the market exchange transaction costs (by directing some resources through a defined organization) can...
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...Abstract This paper will discuss the effect of the transactional cost on mid-size firms and the effect of the Vertical integration in regards to the reduction of transactional cost and the issue of dissimilarity of transactions. Introduction Merriam-Webster defined the organization as a company, business, club, etc., that is formed for a particular purpose, The act or process of putting the different parts of something in a certain order so that they can be found or used easily, the act or process of planning and arranging the different parts of an event or activity. (Merriam-webster.com.2015) The business dictionary defined the organization objective as The overall goals, purpose and mission of a business that have been established by its management and communicated to its employees. The organizational objectives of a company typically focus on its long-range intentions for operating and its overall business philosophy that can provide useful guidance for employees seeking to please their managers.( businessdictionary.com 2015) To address the topic we need to start by defining the main two business terms and their interrelation, which play a major role in understanding the theoretical part of the case. The firm, can simply define as it, is the set of transactions that is organized by supervisory authority instead of the market. In which the aim is to provide the set of services in one place in order to reduce the transactional cost, which by itself can be simply defined...
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...prices and revenues; elasticity of demand. Check Chapter 3 p48 in McNutt and pp20-27 Besanko. 2. We introduce a game theory approach in the materials. Management have a type: for example, a Baumol type signals price. Also price is related to consumer demand. 3. We talk about the player – the decision maker. So could be senior management team of a pricing manager. Point 2..first time introduced to game theory? When we ascribe a management type, then we imply that management are in a game, so we refer to the market-as-a-game. Question: how would a Baumol type play the game? In other words, what is their strategy? Answer [to be tested by observations] is a pricing strategy. Point 3..first time introduced to transaction cost economics [TCE]? Coase and the Coasian question: Why do we need a firm? Answer to be found in Unit 1 and Chapter 3 Besanko: Williamson and TCE wherein the firm is presented as a ‘nexus of contracts’ in a vertical chain. The Assignment No 1 will focus on the economics of the vertical chain. Separate...
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...INSTITUTIONS AND DEVELOPMENT By Mary M. Shirley 1 1. THE CHALLENGE OF DEVELOPMENT Developed countries are the exception, not the rule. Billions of dollars of aid and countless hours of advice notwithstanding, most countries have not been able to foster sustained growth and social progress. Increasingly research has shown that weak, Cross-country missing or perverse institutions are the roots of underdevelopment. regressions persistently demonstrate large and statistically significant correlations between institutional variables and growth, and in horse races between variables, an index of institutional quality “trumps” geography or trade as an explanation for growth (Rodrik, et al. 2002). To meet the challenge of development countries need two distinct and not necessarily complementary sets of institutions: (i) those that foster exchange by lowering transaction costs and encouraging trust, and (ii) those that influence the state to protect private property rather than expropriate it. 1 The first set of institutions includes contracts and contract enforcement mechanisms, commercial norms and rules, and habits and beliefs favoring shared values and the accumulation of human capital. Among the second set of institutions are constitutions, electoral rules, laws governing speech and education, and legal and civic norms. Today’s underdeveloped countries must acquire these institutions under particularly difficult conditions -- in a global market competing with already...
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...Week 1 Assignment Discussion Questions RQ1. Describe three factors that would cause a company to continue doing business in traditional way s and avoid electronic commerce. This answer can be found on pages 15 and 16 and Table 1.5. If we start with the first reason, traditional commerce is well suited for the sales of impulse items that are for immediate use. For instance, I’ve been taking my son to his baseball games for the past few years and every time we have to stop for sunflower seeds. Not only are they an impulse purchase, but they are inexpensive and a “low value. This is reason number two. Items that are low-value transactions, under $10.00 are well suited for traditional commerce. The final reason is for the sales of unbranded goods. Now that makes sense because when you engaged in e-commerce, you can’t physically touch and feel the product, so your instincts will lead you to the brand you recognize. RQ2. Figure 1 -5 lists roommate-matching service as a type of business that is well-suited to a combination of electronic and traditional commerce. In one paragraph, describe the elements of this service that would be best handled using traditional commerce and explain why. I haven’t had a roommate for years, but for a matching service, it would be prudent to meet the person in real life. Profiles for any one online are traditionally self inflated and based on the subjectivity of the writer. But actually meeting the person in person, one can get a better feeling...
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