9. Property Rights; Externalities & Coase

Question 1

The Coase Theorem argues that private bargaining will result in an
efficient solution if:
a. Property rights are well defined and transaction costs are large.
b. Property rights are undefined and transaction costs are large.
c. Property rights are well defined and transaction costs are
small.
d. Property rights are undefined and transaction costs are small.

Answer 1

c. Property rights are well defined and transaction costs are small.

Question 2

For the following question, will the Coase Theorem’s assumptions likely to be true? (In other words, when will the parties be likely to strike an efficient bargain?) My neighbor wants me to cut down an ugly shrub in my front yard—as the ugly shrub imposes an external cost on her and on her property value.
a. Likely to be true
b. Unlikely to be true

Answer 2

a. Likely to be true
Property rights are well defined:
For the Coase Theorem to be likely true, it is important that property rights are well defined. In this case, the property right in question is the right to keep or remove the ugly shrub in your front yard. If the property right is clearly defined, it makes it easier for you and your neighbor to negotiate a solution.

Transaction costs are small:
The Coase Theorem assumes that transaction costs are small. In this context, transaction costs would include the costs associated with negotiating, reaching an agreement, and potentially enforcing an agreement. If these costs are relatively low, it becomes more likely that the parties can efficiently bargain.

Question 3

For the following question, will the Coase Theorem’s assumptions likely to be true? (In other words, when will the parties be likely to strike an efficient bargain?) A coal-fired electricity plant dumps its leftover hot water into the nearby lake, killing the fish. Thousands of homes line the banks of the lake.
a. Likely to be true
b. Unlikely to be true

Answer 3

b. Unlikely to be true
Property rights are well defined:
In this case, property rights are not well defined. The right to use the lake and the right to preserve the fish in the lake may not be clearly established. If property rights are unclear, it becomes challenging for parties to negotiate efficiently.

Transaction costs are small:
The Coase Theorem assumes that transaction costs are small. In this context, transaction costs would include the costs associated with negotiating, reaching an agreement, and potentially enforcing an agreement. Given the large number of homes lining the banks of the lake, and the potential complexity of negotiations, transaction costs may be high.

Question 4

If suppliers expect the price of the product to
decrease next period, what happens to the equilibrium price and quantity
this period?
a. Price goes up and Quantity goes up.
b. Price goes up and Quantity goes down.
c. Price goes down and Quantity goes up.
d. Price goes down and Quantity goes down.

Answer 4

c. Price goes down and Quantity goes up.

Question 5

Variable cost is the summation of…
a. all the prior fixed costs.
b. all the prior marginal costs.
c. all the prior total costs.
d. all the prior sunk costs.

Answer 5

b. all the prior marginal costs.
Marginal cost, on the other hand, specifically refers to the additional cost incurred by producing one more unit of a good or service. It is calculated by dividing the change in total cost by the change in quantity produced.

Relationship:
In the short run, where fixed costs remain constant, the marginal cost is often closely related to variable cost. This is because, in the short run, the change in total cost is mainly driven by changes in variable costs. Therefore, in many cases, the marginal cost is influenced by changes in variable costs.

Question 6

Under the perfect competition model, the firm’s demand curve is
a. downward-sloping.
b. upward-sloping.
c. equal to the marginal product.
d. equal to the market price.

Answer 6

d. equal to the market price.
Under the perfect competition model, the firm is considered a price taker, meaning it takes the market price as given and has no influence over it. In this scenario, the firm’s demand curve is typically horizontal and equal to the market price.
In perfect competition, there are many buyers and sellers, homogeneous products, perfect information, and ease of entry and exit. As a result, each firm in a perfectly competitive market is a price taker, meaning it cannot influence the market price. The firm can sell any quantity it wishes at the prevailing market price but cannot sell at a higher price.

Since the firm can sell any quantity at the market price, its demand curve is perfectly elastic (horizontal) at the market price. The firm’s marginal revenue (additional revenue from selling one more unit) is also equal to the market price.

Therefore, under perfect competition, the firm’s demand curve is not downward-sloping (as it is for a monopoly or imperfectly competitive firm), but rather it is horizontal and equal to the market price.

Question 7

A non-binding price floor occurs when the floor is set ____ the market equilibrium price.
a. below
b. above
c. equal to

Answer 7

a. below