Exploring Coase

18. If you decide to walk around in most communities in the United States without clothing, you will be arrested. Can you justify this? Suppose a community made it illegal for ugly people to walk around town. How would this be different from making it illegal for people to appear in public nude?

19. Externalities are everywhere, but we do not always take them seriously. Which of the following do you think we should consider as legitimate externalities? Why?

a) My neighbor burns his trash and it stinks.
b) My neighbor has loud parties at 3:00 am.
c) My neighbor breaks his leg and I am pained by knowing that he is in misery.
d) My neighbor buys a new car and I am jealous because now he looks more successful than me.
e) My neighbor keeps his dog in a tiny cage and I feel sorry for the poor animal.
f) My neighbor gets a promotion and I am unhappy because he is happy.
g) My neighbor has painted his bedroom walls purple and black and just the knowledge that such a hideous room is next door causes me pain.

20. Zeke and Zach live in an arid region. Zeke grows crops while Zack raises cattle. They both need water, and there is water underground. Suppose that this water is worth $40,000 to Zeke and $30,000 to Zach. Assume there are no transactions costs. What will happen if Zeke owns the water? What will happen if Zach owns the water? In terms of the distribution of wealth, does it matter owns the water? In terms of what gets produced, does it matter who owns the water?

Now suppose that Sal and Sam are neighbors. Sal fishes and Sam farms. Sam's use of pesticides benefits her by $10,000 but the runoff, which cannot be avoided, costs Sal $8000. Assume there are no transactions costs. What will happen if Sam has the right to use the pesticide? What happens if Sal has the right to clean water? What idea is this example trying to illustrate?

Given that transactions costs are never zero, what is the point of examples of this sort?

(This question illustrates in a very simple way an insight from Ronald Coase, that in the absence of transactions costs, externalities would not result in economic inefficiency. When you understand the implications of what Coase was saying, go back to the two previous questions and see if you can explain why some externalities result in laws prohibiting certain actions, and some externalities are usually ignored.)

21. Jack and Jill are walking up the hill, discussing how much they like apples. Jack would be willing to pay $5.00 for one apple. If he had one apple, he would be willing to pay $1.00 for a second. If he had two apples, he would be willing to pay only $.25 for the third. Jill would be willing to pay $3.00 for the first apple. If she had one, she would be willing to pay $.75 to get the second. If she had two, she would be willing to pay only $.10 to get the third.

On the way up the hill, Jack finds three apples. What is the economically efficient distribution of these three apples? Explain.

If we assume there are no transactions costs, what will the "market solution" (Not much of a market here, but treat it as a market) be?

Suppose that instead of Jack finding the apples, Jill finds them. What is the economically efficient distribution in this case? Explain.

What is the market solution in this case?

What kind of transactions costs could exist in this story?

In what way does this example resemble the Coase Theorem?

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