1. The distributional consequences of the delineation of property rights are eli
ID: 1119645 • Letter: 1
Question
1. The distributional consequences of the delineation of property rights are eliminated when preferences are quasi-linear (or in' t he absence of income effects). True or false 2. In a market for a dirty good, the inverse demand function is gi ven by p = 100-y, and the private marginal cost of production is given by MC 10 y. The pollution generated by this indus try creates external damages given by the constant marginal e xternal cost of 2 dollars. (1) Find the competitive equilibrium wi thout regulation (Hint: p=MC) (2) Find the socially optimal out put(Hint: p = MC+ 2) (3) Determine the Pigovian tax that woul d result in a competitive market producing the socially efficient output.Explanation / Answer
ans 1=false
The outcome that under particular conditions the efficient quantity of the item involved in the externality is autonomous of the distribution of property rights is called as the Coase Theorem. It should however be highlighted just how exceptional these conditions are. The quasilinear preference hypothesis means that the demands for the item causing the externality does not depend on the income distribution . Thus a reallocation of endowments does not impact the efficient quantity of the externalities. This is often expressed by stating that the Coase theorem hold good if there are no ‘income impacts.’
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