What is Coase's sentence?
The sentence of the Coase states that in a situation where there is a negative externality, the externality will be worth the same effect on behavior, regardless of which party bearing costs. Only applies if there are no transaction costs. The sentence is important in such areas as environmental policy because it suggests that there are several ways to solve negative externalities such as pollution. The proposal of Ronald Coase on the sentence in his contribution of 1960, the problem of social costs, led the economic community to rethink its reliance on the regulation of quantity and piggy bank as the only tool to reduce negative externalities.
In order to understand the Coase sentence, it can be best illustrated by an example. Consider two roommates, Bob and Carl. Bob is in a difficult class and remains late in their room. The bright light that Bob uses to read gives Carl's headaches and prevents him from sleeping.
If Bob uses light after x hours at night, derives 24x - x
2 isDnots of the usefulness of the higher level he receives in the classroom. It costs 14x units - each hour remains at the top causes 14 damage units, the amount that represents its deprivation of sleep, the actual cost of running light and other factors. As long as Bob gets more usefulness from the lesson of light than it would cost it, the light does not turn off.
The value it gets from each next hour of light is called the limit value and is found by taking the derivative of the usefulness function. Bob's marginal usefulness is 24-2x. This value decreases with every further hour of light and it will only maintain light until the limit of the lesson of the light is 14 that occurs after five hours.
Carl also has a useful function, but light has a negative effect for it. If light is on for x hours, experience 6x damage units. This can deal with this in one of two ways.
onceThe possibilities are that Carl tells Bob that he doesn't like light and asks Bob to compensate him with the inconvenience of having him. If Bob agrees, it will do further work that Carl will give 6 units per hour to use light while Bob loses 6 units per hour of light. This increases the cost of bob every hour of light from 14 to 20. Its boundary value is now equal to its marginal costs after two hours, so it uses two hours of light.
The second option is that Carl decides that if he wants the darkness to sleep, he must give up something to get it. It finds that the maximum number of hours that Bob could have a day a day is 12 hours, which is a place where Bob's marginal tool is zero, and offers him to pay 6 units of use for each hour of these 12, on which the light is not turned on. If Bob uses x hours of light, now gets another 6*(12 - x) units of of. Its new commercial function is 24x - x
From a purely mathematical point of view, it does not matter whether Bob pays Carl for his discomfort, or Carl pays Bob to turn off the light. This is an insight into the sentence Coase. This broke the traditional theory of externality policy that believed that the only ways to reduce negative externalities was to make laws against them, or force the Creator of externality to pay all the costs associated with it.
In some cases, the sentence about Coase does not apply to transaction costs. For example, if the light came from outside and Carl had to organize a group of students to ask the university to turn it off, then the efforts he made to the organization would be transaction costs. He would be willing to offer less to turn off the Three, so the effect on externality would be less than if the university had paid every student.
If there are no transaction costs, the COASE sentence introduces a new optionI and new problems. The policy stipulated is stated by the Group's values. If Bob pays Carla, it means that Carl has the right to the darkness, but if Carl pays Bob, it means that Bob has the right to remain studied. Prioritization of contradictory rights is a problem, although, as the Coase sentence shows, the numerical result is the same.