Question

Question: Assume Andy’s and Helen’s behavior at home is partially regulated by their condominium association, which acts as a small “voluntary government” for its residents. a) Per the Coase Theorem, how might the condominium association assign property rights across Andy and Helen so that a socially optimal level of radio playing is realized? Please explain how a particular assignment of rights would work towards achieving this goal. 3pt b)Your answer from Q3(a) should say something about the market for externalities that arises after an assignment of property rights. Use you answer from Q3(a), along with the information provided in Q1 and Q2, to model the market for externalities. How many hours of externalities are traded in this market when at equilibrium? Is the quantity socially optimal? Please provide a graph with your answer. 3pt c)Instead of assigning property rights, could the association use corrective taxes or subsidies to achieve a socially optimal level of radio playing? Explain.

Answer 1

a).

According to Coase theorem if the property right is assign to any one of the individual then the socially optimum level of output can be produce without any government intervention. So, if the condominium association assign the property right to “Andy” then “Helen” will make some payment to “Andy” to reduce the radio playing to the socially optimum level. Similarly, if the condominium association assign the property right to “Helen” then “Andy” will make some payment to “Helen” to play the radio playing to the socially optimum level.

So, this is how the socially optimum level of radio play is possible by assigning property rights.

b).

Consider the following fig.

So, here “MB” be the demand curve and “MC” be the private marginal cost or the supply function. Now, the “SMC” is the sum of “PMC” plus external cost function. So, the initial equilibrium is “E1” where the “MB” and “MC” cut to each other, => the market level of “q” is given by “3”. Now, the socially optimum level of “q” is determined by the intersection of “MB” and “SMC”, => the socially optimum level of “q” is given by “1.33”. So, the hours of externalities are traded in the market is given by “3-1.33 = 1.67 hours”, which more than the socially optimum level of “q”.

c).

Now, instead of assigning property rights the same thing was possible by using corrective tax by the amount of the external tax. So, if the tax is imposed then the “PMC” will converge to “SMC” and automatically a socially optimum level of “q” will be produced.