Topics in Microeconomics coursework
“The existence of positive or negative externalities resulting from the economic activity in the market for a good or a service can lead to market failure. Allocating property rights, regardless of who holds these rights, will lead to an outcome closer to the socially optimum as compared to that resulting from government intervention.”
a) Explain the validity of this statement by defining and discussing the concepts of:
Market failure and externalities
The types and degree of government intervention when faced with externalities
Property rights, their allocation and the Coase theorem
The validity of the Coase theorem in the presence of transaction costs
b) Explain and then evaluate the argument that …show more content…
Market failure can take different forms including negative and positive externalities. Externalities are an effect whereby those not directly involved in taking a decision are affected by others actions. They occur where social costs exceed private costs; it’s a market failure because the level of consumption is higher than what society requires. Positive externalities occur when social benefits exceed private benefits. It’s a market failure because the level of consumption is lower than what society requires. Positive and negative externalities resulting from the economic activity in the market can lead to market failure as the price equilibrium does not accurately reflect the true costs and benefits of a …show more content…
Externalities require two parties by default so property rights can be with either. The Coase theorem states that “by establishing clear property rights efficiency is achieved regardless of the initial assignment of property rights through trading.” Dassiou (2016 slide ). The Coase theorem however is not valid in the case of transaction costs as it will not work. Transaction costs are expenses incurred when buying or selling a good or service. They come with many different problems including free rider problems. For example, if the affected parties consist of many individuals facing a company each will try to benefit without contributing. In the case of pollution, environment is a public good and hence non excludable and so there are coordination issues. “Dassiou
“The existence of positive or negative externalities resulting from the economic activity in the market for a good or a service can lead to market failure. Allocating property rights, regardless of who holds these rights, will lead to an outcome closer to the socially optimum as compared to that resulting from government intervention.”
a) Explain the validity of this statement by defining and discussing the concepts of:
Market failure and externalities
The types and degree of government intervention when faced with externalities
Property rights, their allocation and the Coase theorem
The validity of the Coase theorem in the presence of transaction costs
b) Explain and then evaluate the argument that …show more content…
Market failure can take different forms including negative and positive externalities. Externalities are an effect whereby those not directly involved in taking a decision are affected by others actions. They occur where social costs exceed private costs; it’s a market failure because the level of consumption is higher than what society requires. Positive externalities occur when social benefits exceed private benefits. It’s a market failure because the level of consumption is lower than what society requires. Positive and negative externalities resulting from the economic activity in the market can lead to market failure as the price equilibrium does not accurately reflect the true costs and benefits of a …show more content…
Externalities require two parties by default so property rights can be with either. The Coase theorem states that “by establishing clear property rights efficiency is achieved regardless of the initial assignment of property rights through trading.” Dassiou (2016 slide ). The Coase theorem however is not valid in the case of transaction costs as it will not work. Transaction costs are expenses incurred when buying or selling a good or service. They come with many different problems including free rider problems. For example, if the affected parties consist of many individuals facing a company each will try to benefit without contributing. In the case of pollution, environment is a public good and hence non excludable and so there are coordination issues. “Dassiou