Econ 201 1st Edition Lecture 28Outline of Last Lecture 1.ExternalitiesOutline of Current Lecture 1. dick and jane exampleCurrent LectureTaxonomy of ExternalitiesIllustrating the Coase Theorem with a Story:These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Dick (a dog lover), Jane (the neighbor) and Spot (the dog)• Spot barks at night, which bothers Jane (a negative externality).• Should Dick be allowed to keep Spot?• Socially efficient outcome depends on social cost and social benefit.• With only two actors involved, there is good potential that a private solution to this externality can be found.• This would be a solution in the spirit of Ronald Coase. Dick, Jane and Spot with Transaction Cost• Let a negotiated solution require a formal contract by a lawyer.– Suppose cost is $250 to be paid by the person without rights. • Situation 1: Net gains (NG) are $300 èNG> transaction cost – So the negotiated solution will still emerge. – Jane pays $250 to lawyer and up to $550 to Dick, who needs $501. • Situation 2: Net gains are $200 èNG< transaction cost – The negotiated solution will not emerge. – If Dick pays $250 to lawyer, his maximum offer to Jane is $750.– She needs $801 – so dog will go, preventing the socially efficient outcome.• If transaction costs are “high,” initial assignment of rights makes a difference in efficiencyof
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