Purchase Solution

Coase Theorem

Not what you're looking for?

Ask Custom Question

A firm can produce steel with or without a filter on its smokestack. If it produces without a filter, the external costs on the community are $500,000 per year. If it produces with a filter, there are no external costs on the community, and the firm will incur an annual fixed cost of $300,000 for the filter.
a) Use the Coase Theorem to explain how costless bargaining will lead to a socially efficient outcome, regardless of whether the property rights are owned by the community or the producer.
b) How would your answer to part (a) change if the extra yearly fixed cost of the filter were $600, 000?

Purchase this Solution

Solution Summary

Coase Theorem for steel produced is determined with smokestack.

Solution Preview

a) Because enternality costs 500k and installing a filter only costs 300k, you can see that:

case 1, property rights are owned by community

then, the community would choose to suffer 300k (paying for filter) rather than suffering for 500k, so filter will be ...

Purchase this Solution


Free BrainMass Quizzes
Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.