Economics is a social science that studies how individuals, governments, firms interact in allocation of resource, distribution of resources and transaction in the market.
Public finance is said to be the center of economics that studies government activities in the economics and how government finances their expenditure. The span of government activities in a country are capitalist in which government activities are narrow, socialist where government undertakes most government activities and mixed economy in which the government takes a larger share of the economics activity.
Externalities occurs in a situation where the buyer and seller do not take into consideration the effect of their action on third party or where there is a spillover effect on production process, externalities also occur when the right to use of environment is in dispute which means there is a need for property right. Which is the law created for firms, individuals for the use of a resource.
Whenever there is an externalities and inefficient allocation of resource by private sector then market has failed to achieve efficiency also If the environment is regarded as being of value why does it suffer abuse? When and how does use of environment become abuse? The simple answer is that these problems are examples of a combination of various aspects of what is commonly known as market failure. These include missing markets, externalities, common property and other related effects. we can say, absence of defined and enforceable property rights over environmental assets that is a key issue with the implication that by assigning property rights a number of problems might be resolved. in which common music noise is subject to dispute. Similar problems arise from excess fishing effort being deployed in international waters. Whenever there are externalities are couple of voluntary solutions to market failure. It is possible for non-coercive solutions to market failures to be produced. Joint supply of a public. Transactions costs in particular get in the way. And we can make use of the Coase theorem: in a world free of transactions costs, any distribution of property rights would yield the same degree of externality production. Example: If a firm has to buy pollution rights, the amount it would pay would depend on the cost of the next least-costly alternative method of disposing of waste. But if the firm already has pollution rights, its decision of whether to give them up would depend on the cost of the next least-costly alternative method of disposing of waste. So you'll get the same amount of externality (pollution) whether the firm owns pollution rights or somebody else does.
Moreover, the Coase theorem states that where there is a conflict of property rights, the involved parties can bargain or negotiate terms that are more beneficial to both parties than the outcome of any assigned property rights. The theorem also asserts that in order for this to occur, bargaining must be costless; if there are costs associated with bargaining it will affect the outcome. The Coase theorem shows that where property rights are concerned, involved parties do not necessarily consider how the property rights are granted if they can trade to produce a mutually advantageous outcome.
1.There are three main assumptions that are, in practice, not always satisfied: Property rights must be defined in some way- as stated earlier, it doesn’t matter how they are assigned, but they have to be assigned.
2.Bargaining must be costless, since otherwise transaction costs could prevent bargaining or drive a wedge between the valuations of the parties that prevents adjustment to the efficient outcome.
3.The decision makers in the bargaining must be economically “rational”- in this context, rationality implies thinking objectively about costs and benefits.
Illustration
Let’s suppose that there are two people in a VIP bus, one seated directly behind the other. The person in front, Samson values the ability to recline his seat at ₵20. The person in back, foster, values the space in front of him at ₵15. These valuations imply that the efficient outcome for the system overall is for Samson to recline, since doing so confers larger benefits on Samson (₵20) than it costs Foster (₵15). If the airline assigns property rights to Samson, there is no room to bargain since Foster doesn’t value his space enough to be willing to offer Samson enough money to get him to not recline (example more than ₵20). In this case, the result will be that Samson reclines. If the airline assigns property rights to Foster, a logical Samson would be willing to offer Foster somewhere between ₵15 and ₵20 in return for Foster allowing Samson to recline his seat. A logical Foster would accept this offer, since he is getting paid more than he values his space, and the outcome would once again be that Samson gets to recline. As the Coase theorem postulates, reclining is the outcome that transpires regardless of how property rights are assigned- the difference between the two scenarios is what the payment structure looks like. (It should be acknowledged that the payment structure will of course affect how good the different parties feel about the eventual outcome, so the initial allocation pf property rights is still relevant from a distributional perspective.
This is the basis of ‘Coase’s Theorem’ which suggests that once property rights are established, optimal outcomes may be achieved via bargaining and crucially that this conclusion is independent of who is given the property right (although there are clearly distributional issues). In the simple analysis we assume perfect competition and costless bargaining we ignore the issue of transaction costs. A good concrete example to consider is that of a farmer who in seeking to maximize private profit uses high levels of agro-chemicals some of which run off and contaminates an adjacent river which requires costly clean-up at society’s expense. In the diagram below a positive assimilative capacity exists which means that the MEC does not start to manifest itself immediately. There is a however a question+n as to who ‘owns’ this as once used up it is unavailable to others.
References:
http://www.polytrauma.va.gov/disclaimer.asp?url=http://www.flowerdeliveryon.com // Oct 15, 2015 at 8:23 pm
Medema, S G and R O Zerbe, Jr. (2000), “The Coase Theorem”, in Boudewijn Bouckaert and Gerrit De Geest, (eds.), The Encyclopedia of Law and Economics, Aldershot: Edward Elgar Publishing: 836-92.
Stigler, G J (1966), The Theory of Price, 3rd ed., New York: Macmillan.
Petri, F. (2004), General Equilibrium, Capital and Macroeconomics, Cheltenham: Edward Elgar.