Peer Review

Private or Public? The Coase Theorem

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Reviewed:: Oct 11, 2021 by Business

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Overall Rating:

Content Quality:

Effectiveness:

Ease of Use:

Overview:

When an activity results in a negative externality (external cost), the market outcome will not be efficient. In these cases, the government may choose to intervene in the market and impose some form of regulation, for example, a legal restriction or a tax. If the external cost the activity creates is borne by those who conduct the activity, the market outcome will be efficient. For example, if a firm dumps its waste into a river, it pollutes the river and creates a negative externality (external cost) for those downstream. The government may intervene to restrict dumping in the river, or it may impose an effluent tax (a tax on each unit of pollution released into the river). If the firm is forced to pay for the pollution it releases into the river, it will dump less. A sufficiently high tax will lead to the optimal reduction in river pollution from the firm. Thus, the firm has internalized the externality. However, in some situations, it may not be necessary to regulate a market to achieve an efficient outcome. It may be possible for the parties affected by an externality to negotiate an efficient outcome on their own. For example, if people who use the river downstream can negotiate with the polluting firm, they may be willing to pay the firm to stop polluting. This idea is embodied in the Coase Theorem, which states that if those who are affected by an externality can negotiate, they may arrive at an efficient solution to the externality problem.

Type of Material:

Assignment

Recommended Uses:

This material could be used in class as an individual or team assignment, or as a homwork assignment.

Technical Requirements:

Software to read a .pdf document

Identify Major Learning Goals:

To understand the outcome of the Coase bargaining agreement between the two parties
To understand that those who are affected by an externality can negotiate
To understand they may arrive at an efficient solution to the externality problem.

Target Student Population:

Major level students in a Microeconomics class
Graduate students in an Economics class

Prerequisite Knowledge or Skills:

Student should have knowledge of the definition of an externality
Student should understand inefficiency in the presence of negative externalities
Student should understand the Coase Theorem

Content Quality

Rating:

Strengths:

The instructions for this material are clear and accurate.
The content is complete and appropriate.
Assignment is taken from a website (www.econedlink.org ) with the same assignment and with answers.

Concerns:

Not original content

Potential Effectiveness as a Teaching Tool

Rating:

Strengths:

Shows the student, by a clear worked example, how the Coase Theorem achieves efficient solutions regardless of who has property rights through bargaining.
Use of the Coase Theorem is demonstrated without the considerations of the theorem’s limitations.
Assignment is an effective exercise to result in student learning.

Concerns:

The material would be improved if there were specific learning goals/outcomes identified and stated.

Ease of Use for Both Students and Faculty

Rating:

Strengths:

The material has clear and accurate instructions for use.
This is a paper exercise without limitations to those who do not have access to a computer.

Concerns:

None

Other Issues and Comments:: If there are specific goals/learning outcomes stated in the materials it would be greatly improved.
Creative Commons: