Externalities and Property Rights

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From the course by University of Rochester

The Power of Markets III: Input Markets and Promoting Efficiency

20 ratings

University of Rochester

The Power of Markets III: Input Markets and Promoting Efficiency

20 ratings

The final module of the Power of Markets course begins by further exploring firm behavior in imperfectly competitive market settings: how firms with monopoly power can increase profits through price discrimination; and the price-output combinations we can expect firms to select in cases of monopolistic competition and oligopoly. We will also analyze monopolies from an efficiency perspective and look at the effects of imperfect information on firm and consumer behavior. We will next turn to exploring input markets and what determines the demand for an input by a firm, an industry, and the overall market. We will also look at the factors that affect input supply and how the supply of an input interacts with demand to determinant input prices. We will use input market theory to analyze institutions and government policies such as the NCAA sports cartel, the minimum wage, Social Security, and immigration. Finally, we will address the concept of market efficiency and what government can do to promote it as well as how government intervention may diminish it.

From the lesson

Week 12 - Can Government Intervention Improve Market Outcomes?

Using Input Market Theory to Analyze the Minimum Wage, Social Security,Immigration, and the NCAA. Promoting Market Efficiency and Why Government Intervention in Markets May be Justified.

Externalities and Public Goods10:38

Externalities11:48

Externalities and Property Rights6:38

Controlling Pollution, Revisited 8:00

Meet the Instructors

Mark Zupan
Professor of Economics and Public Policy
Simon School of Business

Welcome back.

In the last session we looked at external costs and external benefits.

Sometimes goods can be associated with both.

Cell phone usage while driving is a great example of that.

In many states now, cell phones are banned,

drivers can't use them or must use hands-free devices.

The existing evidence though says the external benefits

from cell phone usage while driving significantly exceed the external costs.

Now, that's not to minimize the fatalities that are

caused by cell phone usage by drivers and becoming distracted.

The estimates are that seven, several hundred fatalities occur each year in the

United States due to the drivers being distracted by using their cell phones.

To put that in perspective

though, we have to realize that there are 41,000 fatalities per year in the

United States, so a relatively small percentage

are due to cell phones distracting drivers.

A lot of other activities can distract drivers, or substance abuse can lead

to, to the lion's share of the fatalities that occur in the United States.

There are certain important benefits that occur from cell phone usage.

Drivers are more alert, it's easier to call for help

and if when you're stuck in traffic, the estimates are that

the gains in consumer surplus are on the order of 50

billion per year from being able to use cell phone usage.

Cell phones while driving.

The dead weight loss from banning cell

phone usage while driving has been estimated to

be $40 billion per year when one counts both the

external cost associated with cell phone usage and the external benefits.

And existing studies also indicate that hands-free devices

put only a small dent into traffic fatalities.

Studies both in Japan and North Carolina indicate

that hands free devices prevent 15% of the traffic

fatalities that can be attributed to cell phone usage.

Now in this session we'll also look at to what extent externalities fundamentally

are a problem of property rights not being associated to certain resources.

Think about what happens in labor markets.

Do we get inefficient usage of labor? No.

So long as employers have to pay for your work.

What then, leads to inefficiencies in the case of pollution?

British-born economist, Ronald Coase argued that it's

fundamentally a case of property rights being poorly or

imperfectly defined and that if we can better specify property rights,

we'll end up with efficient usage of a particular resource.

And Ronald Cosin's other insight is it doesn't matter

which side of the market gets assigned the property right.

Take the case of a rancher and a

farmer that have operations right next to each other.

Should the rancher have the property right to

let her cattle graze into the farmer's property?

And not be liable for the damage done? Or should the farmer have the property

right and he have to be paid for any cattle that

does damage to the ranch or grazing over in his property?

Coase's other insight is if bargaining cost are

minimal it doesn't matter who has the property rights.

The important thing is to assign the property rights.

Either give the property rights to the farmer and say

to the rancher, you've gotta pay the farmer for any

damage done.

Or give the property rights to the rancher and tell the farmer, you've gotta pay the

rancher to keep her cattle from grazing over in your property.

So long as the property rights are defined, we'll

end up with an efficient amount of ranching and farming.

And you could imagine in a beach setting if nobody owns a beach

or any property, why externalities, why we'll end up with an efficient outcome.

If people can run their dune buggies or can play loud music.

How, if we don't have to pay for

the damage done, and either of the property right.

We have the property right to blare our music or the person who gets damaged by

our music has the property right to be paid.

Coase's insight would be you'll end up with an

efficient outcome if the property rights are clearly defined.

Now, an important caveat to this is that

sometimes or many times, bargaining costs aren't negligible.

When we look police protection or defense, there're many people who benefit

from a particular activity.

And so may be very hard, it, where there's a case

where there's thousands of farmers that could be potentially hurt by ranchers.

May be harder for the farmers to negotiate effectively with ranchers.

And that may be a reason for government to

be the one to assign damages and to thereby get

us closer to an efficient market outcome.

A classic case and will read with you an economist

Kenneth Bolding, that point out why property rights are so important.

He wrote about the difference between cows and buffalos.

And kind of folding said, the cow now is kept on the farm.

And flourished and came to no harm.

For its owners to thrive, had to keep it alive.

So property worked like a charm.

And in contrast, the buffalo nobodys

property went over the plains, clippity, cloppity.

In thunderous herds where now only birds, flying rabbits go hippity-hoppity.

A hundred years ago, when nobody had property rights to

the buffalo, the buffalo almost became extinct, whereas the cow thrived.

Nowadays, buffalo's making quite a comeback, because

we've figured out ways to better define

property rights to buffalo.

And it illustrates the importance of Ronald Coase's point.

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