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UMass Amherst ECON 103 - Class 8 Coase Fall 2014

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Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Loud parties are an example of public goods. Or bads.Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14The issue of the age: Why don’t we act on climate change?Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Miko01/11/10 10:39 AMMaisy01/11/10 10:39 AMShiroCan the market save Tuvalu?The Coase TheoremBig Points•“Coase theorem:” With clearly specified property rights, individual bargaining will lead to efficient resolution of externalities without government regulation, without regard to the allocation of property rights.•Allocation of property rights will determine distribution of income.•Individual bargaining will not be efficient because of collective action problems, bargaining, and a maldistribution of income.The Problem: Self-interested individuals ignore ‘third-party’ effectsIt is cheaper to pollute.Loud parties are an example of public goods. Or bads.What can neighbors do if they don’t like your loud music?Not to mention other things that beer makes you do?Is there an alternative to calling the police?01/11/10 10:39 AMWe all suffer.Pollution is causing global warmingGood bye VeniceGlobal temperatures are rising.And they will go up more.So long New YorkThe stadium is at the upper right. Under water.It would be rude to cheer.Goodbye to Polar BearsNo more skiing.This is Smuggler’s Notch, Vermont. We ski there.I hope we will still have puppiesAnd kittensThe issue of the age:Why don’t we act on climate change?•We discount the future?•We discount the danger?•We want to free ride while someone else fixes things?•Victims can’t afford to pay us to stop destroying the world?•Victims can’t mobilize to pay us to stop? 01/11/10 10:39 AMPut it another way: What would it take to get us to act?Why care about externalities?Better: When should we care about externalities?We should care if the costs of the externality are greater than the benefits from ignoring it.On the other hand, if the externality is relatively easily fixed and causes relatively more harm, then we should care.Stop externalities where costs of stopping are less than costs of externalityClean up if collective benefits exceed collective costs.Planting wildflowers enriches my neighbors’ view by $500 but only costs me $100.Do it!Leave if collective benefits are less than collective costs.Home renovation cost $5 billion but the view is only worth $3 billion.Bad idea!You try it: Should you get a better stereoIt would cost you $800. You would get $400 of pleasure from it; and your housemates would get $600 pleasure.•Yes, it is efficient! Buy it!•No, it isn’t worth it to you; save your money.Should you drive to school?It saves you $75 bus fare but costs $50 in gas and wear on the care. It also causes $300 worth of congestion and environmental damage.A.Drive! Live fast; die young!B.Take the bus and save the planet!C.Drop out of school and join a monastery.In general, self-interested people will ignore social costs and benefitsPartner, I take care of myself.So who takes care of the rest of us?How do we get people to think of others?We pass laws. And throw those in jail who don’t obeyProblems with lawsPolitical process is imperfectPeople have no private incentive to behaveLaws don’t always work. And sometimes we are glad they don’t.Coase Theorem: With clear property rights and no transactions costs, market will lead to efficient solutionIf total benefits (to you and others) exceed the costs to you then you should do it. Even if the benefits to you are less than the costs, others will pay you to do it.If total benefits (to you and others) are less than the costs to you then you shouldn’t do it.Even if the costs to you are less than the benefits, they will pay you not to do it.Case in point: Your keg party.Neighbors don’t like it. But market transaction can lead to efficient outcomeIf you have a right to party1. If the party is a real problem for neighbors, they can pay you to cancel.2. If the neighbors don’t really care, then you hold the party.If you don’t have a right to party3. If the party is a real problem for neighbors, they make you cancel.4. If the neighbors don’t really care, then you pay them to allow the party.Enjoy yourselves. Responsibly.01/11/10 10:39 AMTry this: Logan Airport noiseShould airlines have a right to make noise? Then residents must pay them to be quiet.If residents have a right to quiet, then the airlines have to pay to make noise.Who has the legal right determines the distribution of incomeIf airlines have a right to fly, then people in East Boston will be poorer: either they pay the airlines to be quiet or they suffer.If residents have a right to quiet, then the airlines are poorer because they have to pay the residents if they want to make noise (or find quiet ways to fly).But it may not be that simpleWe produce negative externalities even with benefits less than the costs if victims act collectively or cannot raise the money because of poverty or problems with collective action.Or, if they are not human.Should we care about nature? Do you?Does Coase mean we don’t need government?No. Collective Action Problems. Many victims, one polluter.How do we get everyone together to pay off the polluter?Many victims, many free riders?If everyone waits for someone else to solve the problem, then will it ever be solved?01/11/10 10:39 AMPernicious bargaining?If you know that others will pay you to stop polluting, doesn’t that give you an incentive to pollute more?Coase assumes a fair distribution of incomeWhat if the polluter is rich and the victims poor? Can the many pay off the polluter?Is it fair for the poor to suffer more from pollution?Is it fair to pay people not to pollute?Do we want to give people a “right” to harm others?1.Yes, it is an individual right and we can trust the market to correct inefficiency.2.No, no one should have such a right. If you want to harm others, you have to buy their consent first.Coase has implications for the type of economic growthIf you have a right to polluteThen your neighbors have to pay you to stop polluting: making you rich.This encourages new business investment and production in polluting industriesIf you don’t have a right to pollute.Then you have to pay your neighbors to allow you to pollute, making you poor.This


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