Question

A petroleum refinery is using the river to release chemicals as an unintended by- product of production. However problem arises because recreational users use the river for swimming and boating.Use the Coase Theorem and discuss various possibilities of efficient outcome among the parties involved

a)Bargaining when rights belong fo refineries

b)Bargaining when rights belong to recreational users.

c)What are the shortcomings of Coase Theorems

Answer 1

a).

According to Coase theorem if the true property is assigned between two party efficient allocation of resources will established privately by bargaining between to party. Now, here if the “property right” is assigned to “Petroleum Refinery” then “Refinery” has the right to pollute into the river. So, here both party come to the bargaining to reduce the level of pollution to the efficient amount and “Recreational user” have to make some payment to “Refinery” for the pollution reduction.

b).

Now, let’s assume that the “property right” is assigned to “Recreational user” then they has the right to have clean water into the river for reusing purpose. So, here both party come to the bargaining to emit some amount of pollution that is socially efficient. Now, “Refinery” have to make some payment to “Recreational user” to emit socially efficient level of pollution. So, here it doesn’t matter where to assigned the property right always the efficient level of output will be produced.

c).

Now, “Coase theorem” fail to get the solution by bargaining, here we assume zero translation cost. Sometime the “translation” is so high that the “total cost” far excide the total benefit, => the efficient allocation of resource will not established. Another problem create if there will be more than 2 party involved then bargaining will provide the efficient allocation of resources.