TOPIC: Coase Theorem The group will develop a lesson to instruct the class on th

Question

TOPIC: Coase Theorem

The group will develop a lesson to instruct the class on the Coase Theorem that will include:

A couple of case examples of how the Coase Theorem works and, most importantly, what it implies for economic organization.

An explanation of the role of efficient outcomes, property rights, transaction costs, and externalities.

Be creative in how you structure your report, but note that at a minimum, your report should include:

How the events you have researched illustrate one or more of the 10 principles of economics

Reference to key terms and theories identified in your reading.

A set of discussion questions the rest of the class should respond to (3 to 4 max).

Each report must have an attribution page that identifies the contribution of each member of the group

Summary and analysis of several current events pertaining your topic.

I am stuck on this from the whole assignment"  A set of discussion questions the rest of the class should respond to (3 to 4 max)".

Explanation / Answer

The Coase Theorem states that when there is no transaction cost, two private parties can bargain over the allocation of resources and reach an efficient outcome in presence of an externality without government intervention.

Let us consider the example of a man playing music at a very high volume at night and his neighbour having problem in sleeping. The man gets a benefit of playing the music at night but it turns out to have a negative externality on his neighbour. The neighbour has an incentive to bargain with the man to arrive at a more efficient solution. According to the coase theorem, the private market can reach the efficient outcome on its own. In this case, if the benefit that the man receives exceeds the cost that the neighbour incurs, it is efficient for the man to play the music and for the neighbour to live with the loud music but it the benefit is less than the cost the neighbour incurs, the neighbour can offer some amount in cash to his neighbour, and if the offer is larger than the benefit of hearing the music, the man would stop playing the music at the high volume.

The example stated above can be related to the first principle of economics, i.e People Face Trade-offs. To get one thing that we like, we usually have to give up another thing that we like. Here, the man is facing a trade-off between whether he should play the music or take the cash from his neighbour. Similarly, the neighbour is facing a trade-off whether he should continue getting sleepless nights or take the cash from the man. The second principle of economics says that The Cost of Something is what you give up to get it. In this example, for the man, the opportunity cost of playing the loud music is losing the cash from his neighbour, and for the neighbour, the opportunity cost of getting sleepless nights is giving the cash. The third principle of economics states that Rational People think at the Margin. Here, we are assuming that both the man and the neighbour are rational and they weigh their cost and benefits and act whichever is higher. The fourth principle states that People Respond to Incentives. In our example, the man responds to the incentive of taking the cash from his neighbour if the benefit of taking the cash is higher.

According to Coase, property rights should be properly defined and enforced to arrive at an efficient outcome under no transaction cost. Thus, what coase theorem imply for an economic organization is that an efficient outcome is possible,in the presence of an externality, when the bargaining parties are very small in number, there is no government interference and no transaction cost.

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