Question

Use the Coase Theorem to explain why the government probably does not need to get involved in the externality that arises when your roommate stays up studying that your sleep is adversely affected, but it probably need to get involved in addressing pollution that causes global warming.

Answer 1

According to the coase theorem in presence of externality and no transactions cost, the bargaining will lead to an efficient outcome regardless of allocation of property rights. In other words, as long as transaction costs are low, the government intervention is unnecessary to internalize the externality. The externality that arises when roommate stays up studying that sleep is adversely affected has lower transaction costs as while bargaining there will be an advantageous outcome to both.

Such that no government intervention is required to do bargaining on the other hand, government intervention is required while addressing pollution because transaction costs will be high. Moreover by assigning property rights to a party that causes pollution will adversely affect environment and cause global warming. So government deals with pollution by imposing environmental standards or by imposing emission taxes (a form of Pig avian tax) and by allowing traceable emission permits to reduce pollution level. Thus externality will be reduced by government intervention while addressing pollution.