slide 1copyright 2004 mcgraw-hill ryerson limited chapter 17 externalities, property rights, and...

Copyright © 2004 McGraw-Hill Ryerson Limited

Chapter 17

Externalities, Property

Rights, and the Coase Theorem


TABLE 17-1Outcome and Payoff Summary for Example 17-1The gain to the confectioner from operating is 40. The loss to the doctor from the noise is 60. The efficient outcome is for the confectioner to shut down, and this happens under both legal regimes.

Net benefit

Legal regime Outcome Doctor Confectioner Total

Liable Confectioner shuts downto avoid liability payment

60 0 60

Not liable Doctor pays confectionerP to shut down,40 < P < 60

60 – P P 60


TABLE 17-2 Outcome and Payoff Summary for Example 17-2The gain to the confectioner from operating is 60. The loss to the doctor from the confectioner’s noise is 40. The efficient outcome is for the confec-tioner to continue operating, and this happens under both legal regimes.

Net benefit


Liable Confectioner stays openand pays doctor 40

40 20 60

Not liable Confectioner stays open;doctor shuts down

0 60 60


TABLE 17-3 Outcome and Payoff Summary for Example 17-3The gain to the confectioner from operating without soundproofing is 40. Soundproofing costs 20. The loss to the doctor from the confectioner’s noise is 60. The efficient outcome is for the confectioner to install soundproofing and to continue operating, and this happens under both legal regimes.

Net benefit


Liable Confectioner installssoundproofing at ownexpense

60 20 80

Not liable Doctor pays confectionerP to install soundproofing,20 < P < 60

60 – P 20 +P 80


TABLE 17-4 Outcome and Payoff Summary for Example 17-4The gain to the confectioner from operating without soundproofing is 40. Soundproofing costs 20. The loss to the doctor from the confectioner’s noise is 60. The doctor can rearrange his office to eliminate the noise problem at a cost of 18. The efficient outcome is for the doctor to rearrange his office, and this happens under both legal regimes.

Net benefit


Liable Confectioner pays doctorP to rearrange his office18 < P < 20

42 + P 40 – P 82

Not liable Doctor rearranges hisoffice at his own expense

42 40 82


TABLE 17-5 Outcome and Payoff Summary for Example 17-5The gain to the confectioner from operating without soundproofing is 60. Soundproofing costs 20. The loss to the doctor from the confectioner’s noise is 40. The cost of negotiating a private agreement is 25. The efficient outcome is for the confectioner to install soundproofing, but this happens only when he is made liable for noise damage.

Net benefit


Liable Confectioner installssoundproofing at hisown expense

40 40 80

Not liable Confectioner does notinstall soundproofing;doctor shuts down

0 60 60


TABLE 17-6 Outcome and Payoff Summary for Example 17-6The gain to the confectioner from operating is 60. The loss to the doctor from the confectioner’s noise is 40. The doctor can escape the noise by rearranging his office at a cost of 18. The cost of negotiating a private agreement is 25. The efficient outcome is for the doctor to rearrange his office, but this happens only when the confectioner is not liable for noise damage.

Net benefit


Liable Confectioner operatesand pays doctor 40 fornoise damage

40 20 60


22 60 82


TABLE 17-7 Steer Prices as a Function of Grazing DensityAs more steers graze on the commons, each steer gains less weight, resulting in a lower price per steer.


FIGURE 17-1 The Tragedy of the CommonsWhen a resource, such as a fishery or a pasture, is owned in common, each user gets to keep the average product of his own productive inputs he applies to the resource. Privately owned inputs will be applied to the resource until X’, the point at which their average product equals their opportunity cost, W, resulting in an economic surplus of zero. The socially optimal allocation is X*, the level of input for which W is equal to the marginal product of privately owned inputs, and results in an economic surplus of S*.


TABLE 17-8 Payoff Summary for Example 17-8The cost to Smith of not smoking is $250 per month. The cost to Jones of living with a smoker is $150 per month. The total savings in rent from living together is $600 per month – $420 per month = $180 per month, which is $30 per month more than the least costly compromise required by shared living quarters, which is the $150 per month it costs Jones to live with a smoker.

Net rental payment ($ per month) Net gain ($ per month)

Jones Smith Jones Smith Total

Live separately 300 300 — — —

Live together;Smith pays JonesX to compensatefor smoke.60 < X < 90

210 – X 210 + X X – 60 90 – X 30


TABLE 17-9 Outcome and Payoff Summary for Example 17-9The gain to the confectioner from operating is 40. The lossto the doctor from the confectioner’s noise is 60. The doctor can rearrange his office to eliminate the noise problem at a cost of 18. The efficient outcome is for the doctor to rearrange his office, and this happens only when there is no tax on the confectioner.

Net benefit


Tax of 60 onconfectioner

Confectioner shuts down 60 0 60

No tax orliability

Doctor rearranges hisoffice at his own expense

42 40 82


TABLE 17-10 Cost and Emissions for Five Production ProcessesEach firm has access to five alternative production processes, A–E, which vary both in cost and in the amount of pollution they produce.

A B C D EProcess (4 tonnes (3 tonnes (2 tonnes (1 tonne (0 tonne(smoke) per day) per day) per day) per day) per day)

Cost tofirm X

100 190 600 1200 2000

Cost tofirm Y

50 80 140 230 325


FIGURE 17-2 The Tax Approach to Pollution Reduction MCX and MCY represent the marginal cost of smoke reduction for firms X and Y, respectively. When pollution is taxed at a fixed rate, each firm reduces its emissions up to the point where the marginal cost of further reduction is exactly equal to the tax. The result is the least costly way of achieving the corresponding aggregate pollution reduction.


PROBLEM 1


PROBLEM 2 With filter Without filter

Gains to Smith $200 per week $245 per week

Damage to Jones $35 per week $85 per week


PROBLEM 3 Withoutsoundproofing

Withsoundproofing

Gains to Smith $150 per week $34 per week

Damage to Jones $125 per week $6 per week


PROBLEM 6


PROBLEM 7


PROBLEM 8


PROBLEM 9 Process A B C D E(smoke) (4 tonnes/day) (3 tonnes/day) (2 tonnes/day) (1 tonne/day) (0 tonne/day)

Cost tofirm X

100 120 140 170 220

Cost tofirm Y

60 100 150 255 375


PROBLEM 15


PROBLEM 16


PROBLEM 17


PROBLEM 18


ANSWER 17-1 Net benefit


Liable Confectioner operatesand pays doctor 18 <P < 20 to rearrange hisoffice

22 + P 40 – P 62


22 60 82


ANSWER 17-3 Net rental payment ($ per month) Net gain ($ per month)

Jones Smith Jones Smith Total

Live separately 300 300 — — —

Live together; andinstall smokeexhaust system,–30 < X < 90

210 + X 270 – X 90 – X 30 + X 120

slide 1copyright 2004 mcgraw-hill ryerson limited chapter 17 externalities, property rights, and...

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