Question

7) Please compare the following in the Coase position and interpret the results. How is resource allocation different with ownership? Please comment on it. (however, there are no transaction costs associated with private negotiations between interested parties.) A runs a dyeing factory and cams A net profit of 2 billion won every year. However, due to sewage discharge, B. the nearby farming owner, suffers A loss of about 400 million won every year. If anyone in A and B invests 300 million won to install sewage purification facilities, the loss can be reduced to 50 million won

Answer 1

“Coase Theorem states that if private parties can bargain without cost or allocation of resources, they can solve the problem of externalities on their own.”

Here, A has a net profit of 2 billion won or 2,000 million won, which results in a loss to B of 400 million won every year.

Now, Benefit to A > Cost to B. [2000 > 400]

Thus, as per Coase Theorem, A should provide the 300 million won for installation of sewage purification facilities, such that B’s loss is minimized.

Ownership vs. Resource Allocation: Ownership implies the sole right to a good, whereas resource allocation implies transfer of that right from one party to another.