Question

1.What are the four problems associated with Coasian solution? Briefly explain each of them.

2. For which type of externalities does the Coasian solutions work?

Answer 1

Meaning of Coasian Solution-

The idea of Coasian solution was given by Ronald H.He suggest that the most effevtive solution to resolve interdependent use of environment is bargaining power.this theorem states that when property conflicts occurs bargaining between the two parties involved will lead to efficient outcome.

The 4 problems are-

Difficulty in assigning property rights...

Its very diificult to assign property rights as the problm at small level when it comes it is difficult to solve ...for large problems issue related to air and pollution.

2- hold out problem- as the first problem sorted out the next priblem arises ie without the permission of the property holder nothing can be done.it might a possibility the propert holder may charge some price for giving permission.

3- free rider problem- the benefits of pollution reduction is enjoyed by all and spread across.it is because the marginal benefit of individual is low compared to cost,hence the incentive left for two is free ride off.

4- higher than zero transaction cost- another problem that is faced is that no one knows the cost involved in marginal damage or cost. Due to large no .of people involved.it is regarded as market failure and provides insufficient solutions.

B● private solutions involved in solving the market failures produced by externalities.it includes moral codes,charities and business mergers.

1- moral codes- it guides individual behavior.individuals know that certain action are considered not right to do orwould get diapprovedreaction.

2- charities- to limit behaviours,chariries are done firom private induvidual.it results in both negative and positive externalities

3- business mergers or contracts in self interest.

This solution was developed to reach an agreement that efficiently address externality.it can be done when 2 partiesbargaun with other to reach agreemenr where everyone is better off.