Question

Question 1. Below is the information about the well-being of two married couples considering divorce. They live in Pandaland - a society where divorce will only be granted if the wife asks for it. Assume perfectly transferable utility and that there are no transaction costs for b and c.

	Couple 1	Couple 2
Current Marital Output/Utility	H=10; W=10	H=10; W=10
Expected Single Output/Utility	H=5; W=12	H=9; W=14

a. What is the Coase Theorem?

b. Will Couple 1 get divorced? Why or why not? If utility needs to be transferred how much utility is transferred and by whom?

c. Will Couple 2 get divorced? Why or why not? If utility needs to be transferred how much utility is transferred and by whom?

d.  How would your answer for Couple 2 be different if instead men (and only men) were given the power to grant divorce but it is impossible to transfer utility? Will any inefficient outcomes occur? Explain.

Answer 1

a)Coase Theorm

Assumption- 1. complete competitive market

2. no transaction cost

Ronald coase has said that in the presence of above two assumption, an efficient outcome would be selected regardless of the property right holding by the parties involved in the negotiations.

b)Couple 1 will get divorced.

Expected utility from getting divorced=12

current utility=10

since expected utility from getting divorced is greater than current utility she will get divorced.

If utility needs to be transferred, wife will transfer 2 unit of utility to husband. More than this will decrease her utility and she will be better in being marital relationship. This is not an efficient outcome.

C)Couple 2 will also get divorced.

Expected utility from getting divorced is 14 and current utility is 10. since expected utility > current utility, she will ask for divorce.

If utility needs to be transferred wife will transfer 1 unit of utility just to make her husband as well as before getting divorced.

D) If husband were given right to grant divorce, they will definately not grant it as in case of both couples husband's expected utility is less than current one and also utility can't be transferred to make them any better.

There is inefficiency in the result since there is infinite cost in tranferring the utility. It is nearly impossible to tranfer the utility to make them any better.