Question

A chicken poultry plant in east Vancouver has been emitting foul odors into the air when they process chicken. The odors negatively affected nearby neighbors’ well-being. The city government has no interest to regulate the poultry industry because there are very few of such operations in Vancouver. To mitigate (reduce) the civic complaints, the poultry company is engaging in a private negotiation with each of the residents nearby.

What economic concept (from this course) can the company consider to resolve this dispute in private negotiation? (2 points) What are the 3 conditions for this concept to be successful in resolving the externality dispute? (6 points) Assuming there are less than 10 households around the poultry plant affected by the odors, can you make a prediction if the company can successfully resolve the problem based on this economic concept?

Answer 1

This situation is an example of a negative externality. The poultry company affects a small number of houses nearby. This is a case where public policy will not work, as mentioned.

Thus, a private settlement has to be attempted. The economic concept applicable here is the Coase Theorem.

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The three conditions for this theorem to work are:

• Very low or zero transaction costs
• Very few parties involved
• Property rights properly defined and enforced upon

In summary, if the transaction costs of negotiating are very high, the theorem may fail. If the number of negotiating parties is very large, negotiations may break down. If property rights are not proper, either side may fail to defend their position.

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The number of involved parties is not very large. Though a smaller number is always preferred, it is still predictable that a consensus can be reached among less than ten households and one firm.

The firm and households can agree upon some compensation, that the firm can pay to the households. In all probability, the problem will be resolved successfully, as per the Coase Theorem.