2. Consider the case where the US has adopted the spectrum property rights schem
ID: 1094215 • Letter: 2
Question
2. Consider the case where the US has adopted the spectrum property rights scheme proposed by DeVany (A Property System for Market Allocation of Electromagnetic Spectrum: a legal economic engineering study 1969). Two carriers operate in the same frequency band. One carrier owns the spectrum in the State of California, and the other in the neighboring State of Oregon. Both operators are complying with the law. The cells on the California side of the border are operating at maximum capacity, and the capacity is not enough for their subscribers. In contrast, even if transmit powers were reduced in Oregon, there would still be excess capacity for Oregon subscribers.
a. If the carrier in Oregon reduced the power of its transmitters, this would increase capacity for some cells in California. Why?
b. Is this system at Pareto optimality? If yes, why? If no, can achieve Pareto optimality be achieved under this property rights scheme? Justify your answer.
c. Is there a market failure present in this scenario? If yes, what kind of market failure? If no, why not? Justify your answer.
Explanation / Answer
a) Since the Oregon is not utilizing its capacity fully, so maximum utilization of capacity can be carried out if this is transferred to another operator in state of California. It would increase the frequency band of operator in California.
b) This is not a Pareto Optimality Situation. Pareto Optimality is said to exist where the one person can not be made better off unless other person is made worse off. Here welfare of people of State of Caulifornia can be increased without making people of Oregon worse off. There would not be reduction in welfare of Oregon people if power is transmitted to the California.
c) This is the case where price mechanism does not work.Thus This is the case of market failure. Oregon would not surrender his property right unless he is paid adequately. But price system does not work here. Price mechanism can solve this problem
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