Question

The living room floor at Ronald Coase’s house is common property. His daughter, Joan, really likes to drop clothing items on the living room floor; Ronald hates this form of littering. If Joan is left to do as she wishes, she will drop 10 items of clothing per week. The table below indicates Ronald’s total willingness-to-pay (WTP) to stop this littering (or, alternatively, his willingness-to-accept (WTA) to allow littering to go on). It also shows Joan’s total WTA to stop her from dropping clothes (or alternatively, her WTP to be allowed to continue with the practice).

Clothes Dropping Reduced (Items/ week)	Ronald’s Total WTP for clean-up ($ / week)	Joan’s Total WTA for clean-up ($ / week)	Ronald’s Marginal WTP ($/ item/ week)	Joan’s Marginal WTA ($/ item/ week)
0	$0.00	$0.00	-	-
1	$1.00	$0.02
2	$1.80	$0.08
3	$2.50	$0.15
4	$3.00	$0.25
5	$3.40	$0.40
6	$3.70	$0.70
7	$3.90	$1.10
8	$4.00	$1.60
9	$4.05	$2.20
10	$4.07	$2.90

a. Fill in the marginal columns, and identify the efficient clean-up level. At the efficient clean-up level, what are the net benefits to the family? What are the net benefits to the family if the floor is completely clean?

b. Graph the marginal costs and marginal benefits of clean-up.

c. Suppose that Joan initially has the right to dump as many clothes as she likes (and dad has to pick up—as is the case for a small kid). If there are no transactions costs associated with bargaining between dad and child, what would Coase predict would be the outcome, and how, specifically, would we get there? (Hint—it has to do with bribery).

d. Now as Joan grows up, dad decides to flip the property rights. Joan no longer has the right to dump her clothes in the living room. Ronald has the authority to penalize Joan (by withholding allowance) if she dumps any clothes. Assuming no transactions costs, what would Coase predict would be the outcome, and how, specifically, would we get there? (Hint: Coase would be a weird dad, since he would….do what?).

Answer 1

Answers

Close Dropping Reduced (Items/ week)	Ronald’s Total WTP for clean-up ($ / week)	Joan’s Total WTA for clean-up ($ / week)	Ronald’s Marginal WTP ($/ item/ week)	Joan’s Marginal WTA ($/ item/ week)
0	$0.00	$0.00	-	-
1	$1.00	$0.02	$1.00	$.02
2	$1.80	$0.08	$.80	$.06
3	$2.50	$0.15	$.70	$.07
4	$3.00	$0.25	$.50	$10
5	$3.40	$0.40	$.40	$.15
6	$3.70	$0.70	$.30	$.30
7	$3.90	$1.10	$.20	$.40
8	$4.00	$1.60	$.10	$.50
9	$4.05	$2.20	$.05	$.60
10	$4.07	$2.90	$.02	$.70

1. dentify the efficient clean-up level. MB=MC at 6 items picked up. At the efficient clean-up level, what are the net benefits to the family? NB=TB-TC= $3.70-$.70=$3.00. (Note Benefits is Ronald’s satisfaction at at having a clean house) What are the net benefits to the family if the floor is completely clean? $4.07-$2.90=$1.17.

1. Ronald pays Joan to pick up six items; a price of $.31 would be sufficient to get her to do that. Ron would not pay for the 7^th item picked up, because the MB to him ($.20) is less then what it would take to get Joan to pick up: ($.40)

1. Ron would allow Joan to pay him for the privilege of dumping her clothes on the ground (instead of just yelling at her). And Joan would leave four items on the ground, since the benefit of the last item to her is $30, and the psychic cost to Ron of that last item is also $.30. Joan would not dump a fifth item, since the MB to her of doing so ($.15) is a lot less than what her dad would fine her ($.40).