Question

1. Describe the Coase Theorem / Coasean Bargaining and what it tells about one solution to the tragedy of the commons? Does the number of people involved impact on the efficiency of Coasean Bargaining?

Answer 1

Answer- Coase theorem is an economic theory developed by economist Ronald Coase. It states that when conflict between two parties occur in a competitive market due to the lack of property right in a certain common good, an efficient outcome will be attained when two parties bargain and any one of them are assigned the property rights. The efficient outcome is however affected by the transaction cost when it is too high.

Let us understand the Coase theorem with the help of an example of tragedy of commons. Suppose party A runs a factory near a lake and party B are the fishermen who catch fish in that lake. The lake is the common good and has no specific owner. The harmful effluents from the factory are leaked into the river which causes the fish to die and the fishermen faces huge loss. Conflict arises between both the parties due to the negetive externality created by the industrial effluents. But, suppose now party A ns party B negotiates and party B is assigned the property rights to the lake. Now party A will pay compensation or fine for releasing effluents into the lake. In this way efficient solution is reached and negetive externality is reduced.

Now, the efficient outcome cannot be reached when bargaining cost is too high. Suppose the party A factory owner is politically very powerful and negotiating with him is not possible without giving bribe. Thus, giving money as bribe increases the transaction cost which keeps party B at loss. Hence, efficient outcome cannot be reached.

The number of people involved will impact the efficient outcome in coase theorem only if more number of people implies greater bargaining costs or transaction cost. Because, according to Ronald Coase, its transaction/bargaining cost that affects the outcome in coase theorem.