Lecture 4

Question 1

Rent Seeking

Answer 1

“Rent seeking” refers to the attempt by interest groups to persuade government officials to pursue options that are beneficial to the group.

Question 2

Coase Theorem Premise

Answer 2

Two parties have an incentive to negotiate an economically efficient and mutually advantageous solution to a dispute.

Question 3

Coase Theorem prequisites

Answer 3

• property rights well defined

- zero (or very low) transaction costs

Question 4

Coase Theorem outcome

Answer 4

Outcome will be the same no matter who has initial property right

Question 5

Advantage of Coase Theorem

Answer 5

Solution is efficient when conditions are right

Government does not need to know MAC or MPD cost

Question 6

Disadvantage of Coase Theorem

Answer 6

• results breaks down with transaction costs (they are almost never zero)
• Results can break down in the case of damages incurred by many agents, due to nonexcludabilityand nonrivalry.

Question 7

Rent Seeking impacts

Answer 7

will lead to government failure and a net wellfare loss

Question 8

Maximizing net social benefit= everyone is better off?

Answer 8

NO

Question 9

Government Inteverntions

Answer 9

Least Cost Policy
-A solution to market failure is termed a ‘least-cost’ or ‘cost effective” solution if it reduces pollution to E´ at minimum cost. (government does not know MPD or MAC)
–> not efficient
Command and Control:
- The government specifies the amount of emissions from each firm, and usually specifies how the emission reduction is to be obtained.
-the primary criticism of the CAC approach is that it delegates all decision-making authority to the government.
-Government can allocate emissions cost effectively only if it knows the MAC curves of all sources.

So CAC is inefficient at two levels:
• inefficient allocation of pollution across firms;
• imposition of inefficient cost structure