Question

APPLICATION 4.0 Ronald and His Daughter 12 The living room floor at Ronald Coase's house is common property. His daughter. Joan, really likes to drop clothing items on the living room floor, Ronald hates this form of littering. F Joan is left to do as she wishes, she will drop 10 items of clothing per week. The table below indicates Ronald's total willingness to pay (WTP) to stop this littering-or, alternatively, his willingness to accept (WTA) continued littering also shows Joan's total WTA to stop her from dropping clothes (or alternatively, WTP to be allowed to continue with the practice). Clothes Dropping Reduced (tems week) Ronald's Marginal WTP Sitem/week) Jaan's Marginal WTA ( m/week) Ronald's Total WTP for dean-up (Sreek) $0.00 $1.00 $1.50 $22.50 $3.00 $3.40 $3.70 $3.90 $4.00 $4.05 $4.07 Joan's Toul WTA for dess-up week) 30.00 $0.02 $0.08 $0.15 $0.25 S0.00 $0.70 $1.10 $1.60 $2.20 $2.90 b. Fill in the marginal columns, and identify the efficient clean-up level. At the efficient clean-up level, what are the set benefits to the family? What are the net benefits to the family if the floor is completely clean Graph the marginal costs and marginal benefits of clean-up. Suppose that Joan initially has the right to dump as many clothes as she likes (and dad bas to pick up is the case for a small child). If there are no transactions costs associated with bargaining between dad and child, what would Coase predict would be the outcome, and how, specifically, would we get there? (Hint-it has to do with bribery.) As Joan grows up, dad decides to flip the property rights. Joan no longer has the right to dump her clothes in the living room. Ronald has the authority to penalire Joun (by withholding allowance) if she dumps any clothes. Assuming no transactions costs, what would Coate predict would be the outcome, and how, specifically, would we get there? (Hint: Conse would be a weird dad, since he would... do what?)

Answer 1

JD MWIA o.02 26 -07 1 O-25 0.5 6-10 -1 3-1 o.40 10 .30 4EHiiut Outene .3 .4 o.2 o.10 -1 I-650 O.50 4.06 2.20 2 90 960 4.07 O.02 o.70 tru poiur wsur The eicut dsau-u RA MWIP TA MWTA ar 6g- Leveli Pck buir AY C r clrau AT t G MC,MB D.q Margiva Copy 0.6 O-4 0.3 O.2 Mangival Eeuepi 0-1 1 2 4

Coase Theorem says, “If private parties can bargain without cost over the allocation of resources, they can solve the problem of externality on their own.”

c) If Joan has the right to dump as any clothes she wants, then:

                          Ronald’s MWTP > Joan’s MWTA

That is, we are to the right of the efficient outcome. Clearly, Ronald would pay an amount to Joan (he would bribe her) until and unless Ronald’s MWTP = Joan’s MWTA.

d) If Joan no longer has the right to dump as any clothes she wants, then:

                          Ronald’s MWTP < Joan’s MWTA

That is, we are to the left of the efficient outcome. Clearly, Joan would pay an amount to Ronald (his father would accept a bribe for the externality caused) until and unless Ronald’s MWTP = Joan’s MWTA.