Question

Part IV. Understanding the Coase Theorem and Its Application in Environmental Policy

What is Coase theorem? (2 Points) And explain how the Coase theorem would apply to a meat packing plant and a spring water producer located downstream. (4 points)

Answer 1

• Coase Theorem says that bargaining between parties involved would lead to efficient outcome if property rights are clear demarcated. It does not matter whom such rights are conferred. There should not be bargaining cost. Cost of bargaining hinders efficient outcome.
• Meat Packing causes negative externalities in forms of pollution and sludge which affect water quality. If right of clean and pollution free environment is conferred upon the community, and spring water producer , then they would sue firm for polluting environment. Thus, firm would be compelled to include social cost in its production decision and output would be curtailed to efficient level.