 Homework #1 Due Sept 4 th  1 st Group Quiz - Monday Sept. 9th  Writing Assignment Due Oct. 23rd

 Sometimes it’s unclear where exactly the pollution is coming from (i.e. nonpoint source pollution)  Not always clear who should pay. (Sturges v Bridgman)

 If property rights are well defined, and no significant transaction costs exist, an efficient allocation of resources will result even with externalities.

 .Two pieces of land that are adjacent. • Farmer McDonald grows crops worth $6,000. • Farmer Brown’s land is on a swamp. Farmer Brown drains the swamp and can grow crops on his land worth $2,000. As a result McDonald’s land flood and destroys his crop.

Coase Theorem Restated

• The theorem states that when trade of an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

 Suppose the a prestigious university invents a new crop so that Brown’s crop is worth $8,000.   What happens if property rights are such that farmers can’t drain swamps?

What happens if property rights are such that farmers can drain swamps?

 The view that a more complete system of property rights and expanded use of market mechanisms is the best approach to solving issues of resource use and pollution control.

 Assumes zero transaction costs

Coase Theorem Problem

• • • • A chemical factory is situated next to a farm. Airborne emissions from the chemical factory damage crops on the farm. The marginal benefits of emissions to the factory and the marginal costs of damage to the farmer are as follows MB= 360 – 0.4 Q and MC=90+0.2Q

From an economic viewpoint, what is the best solution to this environmental conflict of interest?

How might this solution be achieved?

 Free rider effect – the incentive for people to avoid paying for a resource when the benefits they obtain from the resource are unaffected by whether they pay; results in the undersupply of public goods  Examples: office coffee, group projects, multiple communities paying a factory to control its pollution

 Holdout effect – the ability of a single entity to hinder multiparty agreement by making disproportionate demands  Examples: Spirit of St. Louis and the NBA, unanimous voting requirements

 Homework #1 Due Sept 4 th  1 st Group Quiz - Monday Sept. 9th  Writing Assignment Due Oct. 23rd