...Abstract In 1959, Ronald Coase introduced what is now known as the Coase Theorem, which suggests that absent transaction costs, any initial property rights agreement leads to an economically efficient outcome. Straying from previous models supported by most economists, this position was initially met with skepticism. Discussion Prior to 1959, the standard economic understanding held that government regulation enhances efficiency by correcting for claimed imperfections. This thinking was in keeping with A. C. Pigou’s contention that was developed in 1920. Pigou called claimed imperfections, “market failures”. In 1959, Ronald Coase authored an article for the University of Chicago’s Journal of Law and Economics entitled, “The Federal Communications Commission”. In this article, Coase suggested that in the absence of transaction costs, any initial property rights arrangement leads to an economically efficient outcome (McTeer 2003). In Coase’s discussion, he changes the way torts are viewed. In Pigou’s model, one party does harm to another; therefore, government regulation is necessary to ensure that the party filing the claim of harm is no longer harmed. Coase’s model expands the view of harm to include the party accused of inflicting harm on the other party. Specifically, Coase demonstrates that if government regulation is put into place to prevent harm to a party, the entity that is now subjected to the regulation is now being harmed. For example, Company A...
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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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...SUBMISSION QUESTION 7 EXTERNALITIES AND COASE THEOREM (a) Explain what is meant by “externalities”? (b) Consider an industry whose production process emit a gaseous pollutant into the atmosphere. Use the simple supply and demand model to demonstrate that, in the absence of any regulation, this industry’s production will result in allocative inefficiency in the use of society’s resources. Externalities is cost or benefit from production or consumption of commodity that flow to external parties but not taken into account by market (Bajada, 2012). The impact of externalities is the distortion in allocation of resources. Externalities will cause individual to pursuit based on their self-interest. Hence, it will cause commodity not produced at the socially optimal level and output become inefficient (Frank, Jennings and Bernanke, 2009). There are two types of externalities: (1) Externalities cost Externalities cost happens if production or consumption of commodities inflict cost to external parties without compensation (Bajada, 2012). When externalities costs occur, producers shift some of their costs onto community making their production costs lower than otherwise, thus the commodity become underprices and over-allocation of resources (Bajada, 2012). The example of externality cost is industry whose production process emits gaseous pollutant into atmosphere. The pollution will impose higher medical or health costs to the society nearby the...
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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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...BUSINESS SCHOOL - Undergraduate Assignment Feedback Front sheet SECTION A: |(to be completed by the student) | |Please complete Section A in Block Capitals making sure that you include your Student Number, Module Code and Group Number. FAILURE to| |do so may result in your assignment being delayed. If you are unsure of any of the above please check at the Business School Student | |Centre Reception. | |Student Number (s): |U1320055 | | | | |Programme:(e.g. Business Management) |Business Management | |Module Title: (e.g. Studying for Business) |Public Finance |Seminar Group |00 | |Module Code: |FN6002 |Word Count |1524 | I confirm that no part of this assignment. except where clearly quoted and referenced. has been copied from material belonging to any other person e.g. from a book...
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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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...Externality+and+Efficiency+ Contents' Externality+...........................................................................................................................................................+2+ Externality+and+efficiency+................................................................................................................................+2+ Consumption7consumption+externality+..........................................................................................................+3+ Marginal+benefit+and+marginal+cost+of+externality+..........................................................................................+3+ The+Coase+theorem+.........................................................................................................................................+7+ Production7production+externality+ ...............................................................................................................+12+ . Polluting+monopolist+and+the+second+best+problem+.....................................................................................+14+ Public+goods+..................................................................................................................................................+21+ Aggregating+the+MWTP+curves+for+a+public+good+..........................................................................................+22+ Aggregated+market+demand+....................................................
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...Econ 308 Midterm (Average Revenue) (Marginal Revenue) 1.) a.) # Of Operations | Total Harvest | Average Harvest | Marginal Harvest | Marginal Profit 0 0 0 0 0 1 40 40 40 15 2 75 37.5 35 10 3 105 35 30 5 4 130 32.5 25 0 5 150 30 20 -5 6 165 27.5 15 -10 7 175 25 10 -15 8 180 22.5 5 -20 9 182 20.22 3 -22 b.) To figure out the number of logging operations that maximizes the total profits in the logging industry, the number of operations in a stretch of rainforest should be operating up to a set point where the value of the addition to the total harvest exceeds the opportunity cost of a logging operation. The number of operations should stop at four since the fifth operation would bring in $20,000 in marginal revenue, which is less than enough to cover the costs of $25,000 per week. With that being said, four operations would maximize total profits in the industry. When we add up the difference between marginal revenue and marginal profit for the first four boats, the resource rent is $30,000 per day. c.) If profit-maximization is the only guiding principle to enter the logging industry, there will be a constant stream of newcomers looking for a profit and taking advantage of the open...
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...the demands and supply of other products and services. 3. Why the elasticity of demand is an important conderation when analyzing the impact of a shift in supply. 4. Examples of increasing cost industries in New Jersey and propose why they would have a positively sloped supply curve. 5. Under certain conditions, a perfectly competitive market is economically efficient Economics approach to alcohol abuse: Negative externalities, both in consumption and production, production costs, causes pollution too. The two possible solutions suggested by economics are Coase theorm, and Pigouvian taxes. Coase theorem states that in presence of complete competitive markets and the absence of transactions costs, an efficient set of inputs to production and outputs from production will change by agents regardless of how property rights over the inputs were assigned to the agents. Coase theorem doesn’t aloe people to negotiate by themselves without any government intervention if the property rights are secured and the cost of negotiation is not high. Government intervention, effects can be structured using the free market, allowing the government to make all the decisions or a mixture of both. Using the mix, governments intervene in the economy with the goal of helping the society as a whole. In some cases, the market might do what is best for all citizens, at least according to the government. Government intervention may result in some efficiency...
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...Question 2: The Coase Theorem states that if property rights are well defined, and no significant transaction costs exist, an efficient allocation of resources will result even with externalities (Harris, 2002). Coase argued that market failure, can be privately solved to an optimal level when the legal system intervenes, giving property rights to one of the parties involved. Essentially, the theorem is based on two underlying assumptions which are low transaction costs and the assignment of property rights. Firstly, the assignment of property rights is the right to have the exclusive use of their property, including the right to buy and sell it (Hubbard et al, 2009). Initially, polluters pollute because they believe they have the right too although the third party affected believe they have the right to less pollution. Hence without property rights, an inefficient level of equilibrium will be produced until the point in which the market intervenes assigning property rights. Another vital assumption is low transaction costs, which are the costs in time and other resources that parties incur in the process of carrying out an exchange of goods and services (Hubbard et al, 2009). As transaction costs of negotiating, binding and monitoring the agreement are very expensive when many individuals are involved, the transaction costs can exceed the gains from the transaction itself. When these two assumptions are held, an optimal solution will be reached when the monetary damage of one...
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...A) This problem is an example of a negative externality, because there is a cost that affects another party and that party did not chose to incur that cost. This problem is also an example where Coase Theorem applies. The Coase Theorem states that the parties will bargain to the efficient outcome thereby internalizing the externality. B) The allocatively efficient outcome is that the Hockey Pockey does not become the Hankey Pankey. This is because if the Hanky Pankey opens for business the Wholesome Ice Cream will lose $1200 profits per month (decreases number of efficient trades). Therefore that is not the allocatively efficient outcome. C) The allocatively efficient outcome will occur. This will occur because the Wholesome Ice Cream firm will pay the Hockey Pockey any amount greater than $1000 and less than $1200. This is because the expected profits of the transition from the Hockey Pokey to the Hanky Pankey will result in an increase of profits 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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