Negative Externalities Consider the polluting factory: the cost of the smoke and pollution to...
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Coase Theorem Negative Externalities Consider the polluting factory: the cost of the smoke and pollution to residents nearby is external to the factory. Q P P m Private Marginal Cost Total Marginal Costs Q * Q Too Much • Pigouvian analysis: • D=deadweight loss (inefficiency) • Solution: tax factory so private costs=total costs • Internalize the externality D
Negative Externalities Consider the polluting factory: the cost of the smoke and pollution to residents nearby is external to the factory. Q P PmPm
Negative Externalities Consider the polluting factory: the cost
of the smoke and pollution to residents nearby is external to the
factory. Q P PmPm Private Marginal Cost Total Marginal Costs Q*Q* Q
Too Much Pigouvian analysis: D=deadweight loss (inefficiency)
Solution: tax factory so private costs=total costs Internalize the
externality D
Slide 2
In 1960 Coase showed that the Pigouvian analysis was wrong.
External costs do not necessarily create inefficiencies. Consider
our polluting factory again. If firm cuts output from Q Too Much to
Q * it loses C in producer surplus. Q P Q*Q* Q Too Much A Total
Marginal Costs Private Marginal Cost D B C Nearby homeowners
benefit by D+C, more than the loses by the factory. If transaction
costs are low the two parties should be able to find an exchange to
make both better off. e.g. homeowners pay factory D/2+C to reduce
output to Q * Both parties gain!
Slide 3
Market will internalize some externalities automatically
Opportunity cost If homeowners are willing to pay to have
externality reduced then the external cost is a cost to the firm. A
profit maximizing firm will take into account the costs it imposes
on others as long as it is efficient to do so Q P Q*Q* Q Too Much A
Private marginal costs when transaction costs are low Private
Marginal Cost, traditional view D B C Private marginal costs when
transaction costs are low and damages tax is imposed Q Too Little
Now look at effect of damages tax An efficient outcome becomes an
inefficient one!
Slide 4
The divorce rate in the United States has increased
significantly over last 30 years. One way to classify divorce:
unilateral vs. mutual. Under a mutual divorce rule both parties
must agree to divorce. Under a unilateral divorce rule only one
party needs to desire divorce for the divorce to be granted. In the
1970s there was a movement towards unilateral divorce.
Slide 5
Slide 6
Using the assumptions and predictions of the Coase theorem what
should be effect of either law on divorces? Consider John and Mary
and Tom and Gerri, who place different values on being married:
John$7Tom-$12 Mary-$5Gerri$10 Total$2Total-$2 Image from
Divorce-Education.com Coase theorem says that John and Mary should
stay together, and Tom and Gerri should split up. Unilateral
divorce: John pays Mary to stay together; Tom and Gerri divorce
with no payment. Mutual divorce: Tom pays Gerri to divorce; John
and Mary stay together with no payment.
Slide 7
Law should not change the number of divorces, divorce still
takes place when joint benefit of marriage < joint cost of
marriage It should, however, effect how partners are compensated
Mutual divorce gives property rights to the spouse that wants to
stay married, they must be compensated in order for a divorce to
ocurr. Unilateral divorce gives property rights to the spouse who
wants to leave, they must be compensated if the marriage is to stay
intact.
Slide 8
The actual effect of the change in trend from mutual to
unilateral divorce on divorces in the United States has been
debated in the literature. Elizabeth Peters (1986) finds that this
change had no effect on the number of divorces, but did effect
compensation in the form of spousal support at divorce. Leora
Friedberg (1998) finds the shift to unilateral divorce had a
positive and permanent effect on the divorce rate (but explains
only 17 percent of the change in divorce rates between 1968 and
1988.) Justin Wolfers (2006) argues that this positive effect was
only temporary, and leveled off after about a decade so that in the
end it had no discernable effect. Stevenson/Wolfers (2003) show the
effect of divorce law change on well-being and spousal
relations.
Slide 9
Peters suggests two possible models for the marriage contract
Symmetric Information Both spouses have the same information about
the value of their alternatives to marriage (value of divorce)
Bargaining is costless Similar to Coase theorem assumptions
Asymmetric Information Neither spouse knows the value of the others
alternatives Incentives to lie about opportunities to gain larger
share of marital wealth Bargaining is successfully prevented
Slide 10
X=Initial marriage wage for wife A w/h =Value of opportunities
outside of marriage for wife or husband Wife wants divorce when A w
>X (A,C,D) M is the joint product in marriage. Husband when A h
>M- X or M-A h