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Externalities and the Coase Theorem: My neighbor never cuts his grass or cleans up his yard. Doing the work necessary to make the yard look nice would cause $400 of disutility for him. On the other hand, having to look at his messy yard causes me $600 in disutility.
a. Suppose I have the right to require him to clean up his yard, though he can continue to have a messy yard if he pays me enough to get me to accept it. Will he pay me, or will he clean up his yard? Explain.
b. Suppose instead that he has the right to keep his yard as he wishes, but I can pay him to clean it up if I wish. Will I pay him enough to get him to clean up his yard? Explain.
c. Based on your answers to (a) and (b), does the final result (whether or not the yard gets cleaned up) depend on the definition of property rights (whether he has the right to a messy yard, or whether I have the right to require him to clean it up)? Explain. Does the definition of property rights affect the overall well-being of the two parties involved? (Am I better off in one case or the other? Is my neighbor better off in one case or the other?) Explain.

Sagot :

Anthougoidn

Answer:

Externalities and the Coase Theorem

a. He will not pay me, but he can clean up his yard, paying $400.  He cannot pay me $600 (enough) to make me accept his messy yard.

b. I can pay him enough to get him to clean up his yard.  I have $600 disutility to pay for his $400 disutility.  This means that I can pay him enough and have some change.

c. The final result does not depend on the definition of property rights.  Rights are not absolute.  There are accompanying obligations, e.g. cleaning up his messy yard.  Therefore, there will be no violation of his property rights when he is mandated by a relevant governmental authority to clean up his yard or have his rights revoked.

d. The definition of property rights does not affect the overall well-being of the two parties involved.  If his yard starts getting messy to the extent of disturbing neighbors, his property rights will be limited.  I can still be better off with or without his property rights.  I only need a cooperative and understanding neighbor to enhance my well-being.

Explanation:

a) Data and Calculations:

My neighbor's disutility of cleaning his yard = $400

My disutility of having to look at his messy yard = $600

Disutility refers to the uselessness of a thing, signalling the absence of value.

b) According to the Coase theorem, when transaction costs are low and affordable, causing disutility, the two parties involved can bargain with an efficient outcome, despite the existence of some externalities.  Private parties have been known to fail to resolve the problem of externalities when they did not get the involvement of outside parties, e.g. courts and arbitration panels.

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