Slide 1Copyright © 2004 McGraw-Hill Ryerson Limited Chapter 17 Externalities, Property Rights, and the Coase Theorem

Slide 2Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-1 Outcome and Payoff Summary for Example 17-1 The gain to the confectioner from operating is 40. The loss to the doctor from the noise is 60. The efficient outcome is for the confectioner to shut down, and this happens under both legal regimes.

Slide 3Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-2 Outcome and Payoff Summary for Example 17-2 The gain to the confectioner from operating is 60. The loss to the doctor from the confectioner’s noise is 40. The efficient outcome is for the confec-tioner to continue operating, and this happens under both legal regimes.

Slide 4Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-3 Outcome and Payoff Summary for Example 17-3 The gain to the confectioner from operating without soundproofing is 40. Soundproofing costs 20. The loss to the doctor from the confectioner’s noise is 60. The efficient outcome is for the confectioner to install soundproofing and to continue operating, and this happens under both legal regimes.

Slide 5Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-4 Outcome and Payoff Summary for Example 17-4 The gain to the confectioner from operating without soundproofing is 40. Soundproofing costs 20. The loss to the doctor from the confectioner’s noise is 60. The doctor can rearrange his office to eliminate the noise problem at a cost of 18. The efficient outcome is for the doctor to rearrange his office, and this happens under both legal regimes.

Slide 6Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-5 Outcome and Payoff Summary for Example 17-5 The gain to the confectioner from operating without soundproofing is 60. Soundproofing costs 20. The loss to the doctor from the confectioner’s noise is 40. The cost of negotiating a private agreement is 25. The efficient outcome is for the confectioner to install soundproofing, but this happens only when he is made liable for noise damage.

Slide 7Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-6 Outcome and Payoff Summary for Example 17-6 The gain to the confectioner from operating is 60. The loss to the doctor from the confectioner’s noise is 40. The doctor can escape the noise by rearranging his office at a cost of 18. The cost of negotiating a private agreement is 25. The efficient outcome is for the doctor to rearrange his office, but this happens only when the confectioner is not liable for noise damage.

Slide 8Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-7 Steer Prices as a Function of Grazing Density As more steers graze on the commons, each steer gains less weight, resulting in a lower price per steer.

Slide 9Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 17-1 The Tragedy of the Commons When a resource, such as a fishery or a pasture, is owned in common, each user gets to keep the average product of his own productive inputs he applies to the resource. Privately owned inputs will be applied to the resource until X’, the point at which their average product equals their opportunity cost, W, resulting in an economic surplus of zero. The socially optimal allocation is X*, the level of input for which W is equal to the marginal product of privately owned inputs, and results in an economic surplus of S*.

Slide 10Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-8 Payoff Summary for Example 17-8 The cost to Smith of not smoking is $250 per month. The cost to Jones of living with a smoker is $150 per month. The total savings in rent from living together is $600 per month – $420 per month = $180 per month, which is $30 per month more than the least costly compromise required by shared living quarters, which is the $150 per month it costs Jones to live with a smoker.

Slide 11Copyright © 2004 McGraw-Hill Ryerson Limited TABLE 17-9 Outcome and Payoff Summary for Example 17-9 The gain to the confectioner from operating is 40. The loss to the doctor from the confectioner’s noise is 60. The doctor can rearrange his office to eliminate the noise problem at a cost of 18. The efficient outcome is for the doctor to rearrange his office, and this happens only when there is no tax on the confectioner.

Slide 12Copyright © 2004 McGraw-Hill Ryerson Limited TABLE Cost and Emissions for Five Production Processes Each firm has access to five alternative production processes, A–E, which vary both in cost and in the amount of pollution they produce.

Slide 13Copyright © 2004 McGraw-Hill Ryerson Limited FIGURE 17-2 The Tax Approach to Pollution Reduction MC X and MC Y represent the marginal cost of smoke reduction for firms X and Y, respectively. When pollution is taxed at a fixed rate, each firm reduces its emissions up to the point where the marginal cost of further reduction is exactly equal to the tax. The result is the least costly way of achieving the corresponding aggregate pollution reduction.

Slide 14Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 1

Slide 15Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 2

Slide 16Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 3

Slide 17Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 6

Slide 18Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 7

Slide 19Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 8

Slide 20Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 9

Slide 21Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 15

Slide 22Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 16

Slide 23Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 17

Slide 24Copyright © 2004 McGraw-Hill Ryerson Limited PROBLEM 18

Slide 25Copyright © 2004 McGraw-Hill Ryerson Limited ANSWER 17-1

Slide 26Copyright © 2004 McGraw-Hill Ryerson Limited ANSWER 17-3