Coase Theorem Examples

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Over the years, many concepts have been proposed on how to remedy subpar conditions, the Coase Theorem being an interesting example. The Coase Theorem provides explanation of how these conditions can be resolved and will be discussed in relation to a specific example. One example of a suboptimal condition is that of property damage. Person A had decided to revamp their property and build a go-kart course, but during this process, Person B believed that the course has been built on part of his land, thereby decreasing his property value. On the other hand, Person A believes that the course was all built on his own land. In this situation, it is uncertain who the property belongs because no boundaries were established. As a result, Person B is unhappy because he believes his property value has been decreased and the course is an eyesore. Not only this, but the go-karts are considerably noisy and are frequently used. Person A is happy because he now gets to enjoy a go-kart course. This situation is suboptimal because Person B’s property …show more content…

The first issue is the property rights, which are the rights to benefit and control property (Wellhausen, 24 January 2018). In this scenario property rights have not been assigned because the two actors disagree about to whom the property belongs. To apply the Coase Theorem, it does not matter who owns the land, just as long as it is owned then a solution can be reached. Another issue that arises is the negative externalities, which are the harm that is done to a separate party who is not involved in the transaction (CITE). In this case, the negative externality would be the noise that is generated by the go-karts because not only does it affect Person B, but it also affects the neighbors in the surrounding area as well as it negatively impacts the real-estate value of that area. With this in mind, there are two ways that this situation could play out which will be

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