Lecture 26 The Regulation Game

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Lecture 26 - The Regulation Game

• Wissinks Words

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remarks

• Another fun and educational experiment.
• Neat way to demonstrate how the government can
  work with the market to enhance efficiency in a
  problematic situation.
• Several real word attempts are actually being
  employed to harness the power of the market with
  the help of the government.

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• Ronald Coase intellectual grandfather for
  these ideas. A real pioneer. A Nobel laureate
  from the University of Chicago.
• Chicago Board of Trade and the US Government are
  currently involved in markets for various
  pollution rights.
• See the CBOT Web page http//www.cbot.com/points_
  of_interest/ecocenter/ecocntr.html

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efficiency and equity, again...

• Upstream steel mill and downstream fishery story
  illustrates the tension.
• Coase Theorem if we establish property rights
  if we get price taking behavior if there are no
  transaction costs for all this, then we will get
  an efficient allocation via the market.
• But who should get the property rights?
• The fishery?
• The steel mill?

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a frequently made mistake

• The mistake Using the Coase Theorem to argue
  that the outcome in the market, after
  establishing property rights, is independent of
  how the rights are distributed, so long as they
  are established.
• What is true? Assume the requirements for the
  Coase Theorem are satisfied. Then if you
  establish property rights and allow trade, you
  will get an efficient solution. Will the outcome
  be independent of the distribution of property
  rights? Probably not. The outcome will be
  efficient, but not necessarily the same.

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final note

• The Coase Theorem is very helpful.
• Always need to keep in mind both the efficiency
  and equity aspects of the allocation, whether
  market or government determined.
• There is frequently a tension between the two
  attempts to enhance efficiency may create
  inequities and attempts to enhance equity may
  introduce inefficiencies.