Quiz 7.4

According to the Coase theorem, which situation would MOST likely result in a private bargaining solution and yield an efficient market? Your neighbor's dog routinely gets out of his yard and does his "business" in your yard. A railroad train that runs the entire East Coast regularly emits both pollution and loud noises for people living near the tracks. People who get flu shots actually end up decreasing the spread of the virus. A company recently turned an abandoned factory at the end of your street into a paper mill that now stinks up the entire town.

A

One of the main problems with the Coase theorem is that: bargaining costs are generally not low (or zero). individuals only act in their own self-interest. the consumer evaluation theorem implies that bargaining costs are not sufficiently high. a corrective tax or subsidy is needed to ensure that a social optimum is reached.

A

Which of the following statements describes the Coase Theorem? -If bargaining is costless, and property rights are clearly established and enforced, then externality problems can be solved through private bargaining. - Even if bargaining is not costless, and property rights are unclear, externality problems can be solved through private bargaining. -If the marginal benefit of a good exceeds the good's marginal cost, more of it should be produced. -Elimination of an externality is possible only when the marginal benefit of a good is no higher than its marginal cost.

A

A familiar example of a negative externality is loud music in a busy park on a weekend. In principle, it should be possible to solve this externality by permitting park visitors to negotiate rights to play music in particular locations or at specific times. The most likely reason these negotiations do NOT occur is that: most people are unfamiliar with the Coase theorem. the bargaining costs of identifying and establishing communications between all affected parties would be high. music is an experience, not a good. some park goers do not view loud music as a negative externality.

B

A large farming operation which uses a potent fertilizer is located up river from a trout farmer. If property rights of the river exist and transactions costs are low, the amount of pollution will be inefficient if the farming operation owns the river. efficient if either the farming operation or the trout farmer own the river. efficient only if the trout farmer owns the river.

B

The Coase theorem implies that: private individuals will not produce the socially optimal outcome because bargaining costs are generally quite high. given low bargaining costs, private individuals can achieve a socially optimal solution without the involvement of the government. given external costs, the government must intervene to achieve the socially optimal output. all goods that generate an external cost (or benefit) should be produced up to the point where the marginal social benefit equals the marginal social cost of the good.

B

Traffic congestion is a common example of a negative externality. In principle, it should be possible for drivers to negotiate the right to drive at particular times, thereby compensating those who would prefer not to drive at peak times and solving the externality. The most likely reason these negotiations do NOT occur is that: individuals are unfamiliar with the Coase theorem. the bargaining costs of such negotiations would be prohibitive, as there are (in large cities) many interested parties. such an agreement could not be enforced, since all individuals have free access to all public roads. the punitive nature of the negotiations for those not involved would ensure it cannot come to pass.

B

Ronald Coase's ideas on property rights have helped economists and policymakers better understand environmental problems. Identify the true statement regarding Coase and property rights. Coase contended that property rights refer exclusively to ownership of land. property rights allocation is unimportant because the affected parties will contract with one another to find an efficient solution to externality problems regardless of who is assigned the initial property right. the assignment of property rights to someone is essential. environmental harms will be greater when property rights are assigned to firms.

C

Why might an efficient outcome be reached even without Coasian bargaining? It is not possible to reach the efficient outcome without bargaining and payments. When many people are involve, the benefits of coming to an agreement are very large. Social norms can lead people to consider the impact on others, even without bargaining and payments.

C

Your college roommate has the right to practice her tuba during the day. You, however, find that studying during the day is most conducive to good grades, and her tuba-playing makes it difficult for you to concentrate. You make a deal with your roommate: you will clean the dorm room once a week if she will practice her tuba at other times or elsewhere. This is an example of emission permits. a corrective tax. a corrective subsidy. the Coase theorem.

D