Lecture 4

Question 1

Coase Theory

Answer 1

markets can arrive at the social optimal outcome, even in the presence of externalities

Question 2

Assumptions of Coase theorem

Answer 2

1. Bargaining is easy and inexpensive (transaction costs are low)
2. Deals are easy to enforce

Question 3

Message of coase theorem

Answer 3

The allocation of property rights has no bearing on how economic resources are used

Question 4

Application of Coase theorm

Answer 4

1. Bargains can happen even in the presence of large transaction costs, as long as the gains from trade exceed those costs
2. Inspiration for environmental policy: clear assignment of property rights can help reduce negative externalities
3. Strong rationale for interventions that reduce transaction costs

Question 5

Tragedy of the commones

Answer 5

A number of people sharing common access to a natural resource will tend to overexploit is unless they can establish government institutions or social norms to regulate its use

Question 6

Open-access goods

Answer 6

goods that are non-excludable and rival

Question 7

Connection between open access resources and externalities

Answer 7

each user imposes a negative externality on other users because the resource has diminishing marginal returns

Question 8

collective action problem

Answer 8

a collection of agents - people, firms, countries etc. - may all be better off (or no worse off) cooperating, buy they fail to do so because each individual member of the group has incentives not to cooperate