Question

1. Consider how Coase Theorem can be applied to the following scenarios. Specifically, think about the following issues for each of the scenarios: (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.

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.

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

Answer:

The conditions that are required to make the Coase theorem effective are:

1. Minimum transaction cost: Transaction cost will make the Coase theorem ineffective. Zero transaction cost will lead to the efficient outcome.
2. Zero wealth effects: the transaction needs to have zero income and wealth effects in order to make the efficient outcome.
3. No government interference: if government interfere in the transaction then it may lead to the inefficient outcome

following the above conditions the conclusions are as below:

(a) chicken farming factory:

In the given case where chicken factory is operating and produces foul smell the property rights are NOT well defined.

No, because the property rights not defined the trading will not take place but the new firm will prefer to pay chicken factory if they can reduce the smell and traffic.

No not any of the assumption is violated,

the assumption of trade in an externality and low transaction costs are present which are required for the Coase Theorem.

(b) Comprehensive Environmental Response, Compensation and Liability Act:

In the given case where companies that generated the waste are responsible for the costs of its clean up.NO property rights are not well defined.

YES, the trading will take place because the companies that generated the waste are responsible for the costs of its clean up.

NO, the assumption low transaction costs are present for Coase Theorem are not violated here.

(c)  man comes onto a bus in Manilla with an opened container of Durian:

In the given case w man comes onto a bus in Manilla with an opened container of Durian, a fruit known for its extremely strong smell. YES the property rights are well defined.

No, the trading will not take place because Eating the fruit on public transport is frowned upon by the company running the scheduled bus routes

Yes, the assumption low transaction costs are present for Coase Theorem to hold seems violated here