Question

Consider how Coase Theorem can be applied to the following scenarios. Specifically, think about the following issues for each of the scenarios: 15 Marks (i) Are property rights well defined? (ii) Will trading take place? (iii) Are any of the key assumptions within Coase Theorem likely to be violated in any way? a. A chicken farming factory has opened in industrial Unanderra. The factory produces a foul smell that settles over the center of Unanderra as well as increased traffic to and from the factory on Princes Highway. b. Many hazardous waste sites were created decades ago, often before the harm associated with the waste was well known. The Comprehensive Environmental Response, Compensation and Liability Act, also known as the Superfund law, states that the companies that generated the waste are responsible for the costs of its clean up. c. A man comes onto a bus in Manilla with an opened container of Durian, a fruit known for its extremely strong smell. Eating the fruit on public transport is frowned upon by the company running the scheduled bus routes.

Answer 1

a) In this case property rights are not well-defined since it is unclear if the factory has the right to pollute or citizens have the right to clean, non-smelly air. Also, the increased traffic to and from the factory imposes an additional cost to the society. The transaction costs are high because negotiations between the center and the factory will not be costless in terms of time and money. The coase theorem is violated because property rights are not well-defined and transaction costs are high, so trading would not take place.

b) " The Comprehensive Environmental Response, Compensation and Liability Act, also known as the Superfund law, states that the companies that generated the waste are responsible for the costs of its clean up. "

In this case, the property rights are clearly defined- the companies generating the waste are responsible for cleaning it. If transaction costs are not very high, an efficient social solution would be reached and coase theorem would be satisfied.

c) "Eating the fruit on public transport is frowned upon by the company running the scheduled bus routes." The property rights lie with the company running the scheduled bus routes and therefore the company and the man can easily reach a socially efficient solution wherein the man either pays a penalty for eating the fruit on public transport or he chooses not to travel on that bus.