Question

Jones and Smith are neighbors. Jones runs a marijuana shop out of his home. Smith, a doctor, sees patients at his home. Jones makes an annual profit of $1.5 million from operating his marijuana business. Smith earns $750,000 annually from his medical practice, but he would earn $1.2 million without the disruption caused by Jones’marijuana selling activities.

(a) Suppose the law imposes no restriction on what a homeowner may do in his home. What would the outcome be, as predicted by Coase?

(b) Suppose the law requires that one’s neighbors consent to what a homeowner does in his home. What would the outcome be, as predicted by Coase?

(c) How optimal would the outcome be in case (a) and case (b)?

(d) What are transactions costs?

(e) How might the presence of transactions costs affect Coase’s analysis?

(f) What does Coase see as the role of government in this case?

( Please type all this answer,do not handwriting,thanks!)

Answer 1

a) The outcome would be that both Jones and Smith would continue their businesses at their respective homes because there is no law or property right.

b)The maurijana producer has no loss if the doctor works. If the law requires one neighbour's consent, then the doctor would refuse to provide the consent as it would mean reduced profits for doctor. So in this case only the doctor would work and not the marijuana worker, if he provides consent for doctor.

c) The optimal one would be where both are producing because this would mean that the society's surplus would be more when both are working, rather then when only doctor works. When both work, even though doctor is earning less, but the overall profits are more.

d) Transaction costs are the costs which occur when trading takes place. In this case, the costs would be the cost of reaching a consensus between both the doctor and the marijuana worker , such that both are benefitted

e) the transaction costs reduce the efficiency. Higher the costs, higher would be the bargaining and lower would be the efficiency.

f) The government can allocate property rights to different owners. If the people have the rights, then there would be bargaining and efficient solution be reached. if fisherman have right to clean water, then the industry owners would be liable to prevent water from polluting.

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