Question

Please compose three full paragraphs (one page single spaced) with any graphical or technical analysis as appropriate for each question. 1. Explain how either the Coase Theorem or the Compensation Principle might help in the following situations? a) One neighbor in a subdivision who does not maintain his/her property and makes it less attractive to everyone (and reduces adjacent property values).

Answer 1

The Coase Theorem concerns conflict or conflicting interests regarding property rights. It states that the parties involved can negotiate terms which are more beneficial than the assigned property rights to the parties. The bargaining that happens between the parties should be costless for the most beneficial outcome to be achieved otherwise the relating costs will affect the outcome. The parties involved can discuss and arrive at a mutually consented and advantageous outcome without outside interference. The Compensation principle concerns decision rule that is used to select between various alternative decisions. The logic behind this is if the party which is gaining from the decision can compensate the other party then none is left worse off from the decision.

In this case, the neighbor who does not maintain his/her property cannot compensate for the reduction in value of every other property in the vicinity. Hence the coase theorem should be applied and a joint effort should be made from every property owner to discuss/negotiate with the particular neighbor to maintain the property as well as the surroundings. If the coase theorem does not work after multiple attempts, standards regarding the maintenance of property should be mutually decided and set forth for every property owner to follow. Non-adherence of these standards should lead to penalties which can use the logic behind the Compensation principle.