EC 201 Lecture Notes - Lecture 18: Coase Theorem, Externality, Pareto Efficiency
Document Summary
Coase theorem: relates to how the private market/individuals can achieve the socially efficient outcome even if there are externalities, government is not necessary. In order to be applicable: need property right, small number of parties involved, transactions costs are low, outcome is the same, regardless of who has the property rights. Mike is willing to pay 8 to be able to be loud ( $ 2) Jim is willing to accept to suffer through loud noise ( $ 5) Mike is willing to pay 8 to be able to be od. Jim is willing to accept 15 to suffer through loud noise. Since mike is only willing to pay 8 and jim needs at least 15, jim will not sell his property right to a quiet evening. If there is loud noise, he makes in profit. If there isn"t loud noise, he makes in profit. Mike is willing to accept 8 to be quiet.
