Question

Suppose that a coal factory emits pollution into the air and that a nearby neighborhood is harmed by this pollution. It would cost the coal factory $12,500 to clean up the pollution. The neighborhood values the cleanup at $15,000. Assuming that transaction costs are low and the Coase theorem holds, for each scenario below, determine whether we would expect the pollution to be cleaned up or not.

a. If the coal factory owns the right to pollute the air:

-the coal factory will continue to pollute

- the neighborhood will negotiate to get the pollution cleaned up.

b. If the neighborhood owns the right to clean air:

-the neighborhood will require the coal factory to clean up the pollution.

-the coal factory will negotiate to get the right to pollute.

Answer 1

Coase theorem:Coase's main thesis is that the decision reached regarding the assignment of property rights has no bearing on whether the coal factory continue to pollute the air as long as the neighborhood can bargain without cost.

transaction costs is low = efficient bargaining

expected cost is low ( scenario below)

(a.) To cleanup the pollution:

coal factory = $12,500 (low)

neighborhood =  $15,000 (high)

To cleanup the pollution by neighborhood is greater than the cost for cleanup the pollution by coal factory.

-The coal factory has the right to pollute the air, the coal factory will stay in area and no money will change hands. This is because the neighborhood aren't willing to pay ( $15,000 ) enough to cleanup the pollution. Then the coal factory will continue to pollute the air.

And

-The neighborhood will negotiate to get the pollution cleaned up: When the factory gives some amount of money to each neighborhood as compensation of pollution, because the cost for neighborhood to cleanup is(more) double ($15,000) than the cost to cleanup by coal factory($12,500).

(or)

The coal factory can cleanup the pollution at the cost of $12,500.

(b.) If the neighborhood owns the right to clean air:

-the neighborhood will require the coal factory to clean up the pollution, because the money to cleanup the pollution for neighborhood is more($15,000). If the neighborhood doesn't willing to pay the cleanup then it must require the coal factory to cleanup.  

-the coal factory will negotiate to get the right to pollute is not good in my view. Other than this the coal factory must pay the money($12,500) for cleanup the air pollution or compensate the neighborhood with money which is less than $12,500.