Question

1. Dr. M’s next door neighbors like to burn garbage in the front yard. They like to do this all day, every day. He prefers they not do it at all.

In order to solve this conflict using the Coase Theorem, does Dr. M need Sumner County to pass laws regulating or taxing the burning of trash? [Briefly summarize the Coase Theorem and its assumptions and apply its main conclusion to this situation.]

Why is the Coase Theorem more likely to be helpful in this case than in the case of air pollution caused by a large, coal fired power plant near a densely populated urban area?

Answer 1

The Coase theorem basically states that in an ideal economic condition (assumption) when there is a property rights conflict , the parties involved can negotiate or bargain terms that will refelct accurately the full costs and the values underlying of the property rights at issue .In order this to happen , assumption made like competitive market , absense of transaction cost.In this case also , the Coase theorem is applicable because , this is a case of property right where there is no transaction cost involved so it can be solved using coase theorem  where two neighbour are having a conflict of garbage burning .Now in this two settlement can happen , one is that Dr. M is compensated by the nighbour in any amount /input so that neighbour is allowed to burn the garbage in front yard or Dr. M should pay neighbour in order not to burn .Or the best solution provided hee is that Dr. M can get Summer county to pass the laws regulating or taxing the burning of trash as it will not invoke any transaction cost .The coase theorem isapplicable hee becuase there is a dispute over the property rights addressing burning garbage which hurt the sentiment of Dr. M and is having an inefficient output .But in case of large coal fired power plant it is not helpful because if the plant are govt. properties and are meant for producing electricity or other output ment for public use and also involve economic transaction .While coase theorem deals with individual conflict of property right .