In the case of a market failure, government intervention may not be necessary to allocate resources...

 

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In the case of a market failure, government intervention may not be necessary to allocate resources efficiently. a) (4 points) Define and describe the Coase Theorem. b) (4 points) Under what circumstances can the Coase Theorem fail to produce an efficient solution? c) (10 points) Many people contend that the polluter pays principle reflects the appropriate allocation of property rights; in other words, that society has the legitimate right to be compensated for pollution damages and polluters do not have the right to pollute. Suppose that a firm is polluting a river that is the source of drinking water for a town of 1,000 people who live downstream of the factory. If it would cost $300,000 for the firm to install pollution abatement equipment, could the private parties (i.e., the firm and the townsfolk) solve the environmental problem regardless of which party had the right to pollute? Who would win and lose, and by how much? Explain using numerical examples. In the case of a market failure, government intervention may not be necessary to allocate resources efficiently. a) (4 points) Define and describe the Coase Theorem. b) (4 points) Under what circumstances can the Coase Theorem fail to produce an efficient solution? c) (10 points) Many people contend that the polluter pays principle reflects the appropriate allocation of property rights; in other words, that society has the legitimate right to be compensated for pollution damages and polluters do not have the right to pollute. Suppose that a firm is polluting a river that is the source of drinking water for a town of 1,000 people who live downstream of the factory. If it would cost $300,000 for the firm to install pollution abatement equipment, could the private parties (i.e., the firm and the townsfolk) solve the environmental problem regardless of which party had the right to pollute? Who would win and lose, and by how much? Explain using numerical examples.

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a The Coase Theorem developed by economist Ronald Coase states that if property rights are welldefined and transaction costs are low private parties can negotiate and reach an efficient allocation of ... View the full answer