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Chapter 15: Problem 1

Review the example in the section on "The Coase Theorem," where the resident's harm was greater than the truck driver's benefit from using the shortcut. Suppose the situation were reversed. Specifically, suppose that the truck driver gains \(\$ 12\) by using the shortcut, and the harm to the resident is \(\$ 7\) a. Is it efficient for the truck driver to stay on the highway and not use the shortcut? Briefly, why or why not? b. If the truck driver has the legal right to use the shortcut, would you expect the resident to offer him a sufficient side payment to get him to stay on the highway? Why or why not? c. If the resident has the legal right to block the truck driver from using the shortcut, would you expect the truck driver to stay on the highway? Why or

Short Answer

Expert verified
a. No, it is efficient for the truck driver to use the shortcut because his gain ($12) is greater than the resident's harm ($7).\nb. No, the resident would not offer a side payment because the driver benefits more from using the shortcut than the resident loses.\nc. Yes, if the resident has the power to block the shortcut and does not negotiate a fee with the driver, then the driver would most likely stay on the highway.

Step by step solution

01

Establishing Gains and Losses

To determine whether it is efficient for the truck driver to use the shortcut, compare the driver's gain from taking the shortcut, which is $12, with the resident's harm from him doing so, which is $7. If the driver's gain exceeds the resident's harm, it is socially efficient for the driver to take the shortcut.
02

Assessing Efficiency

Because $12 (the driver's gain) is greater than $7 (the resident's loss), it would be economically efficient for the truck driver to take the shortcut. This is because the total net gain of doing so ($12 - $7 =$5) is positive, meaning society as a whole benefits from the driver taking the shortcut.
03

Rights of the Truck Driver

If the truck driver has the legal right to use the shortcut, the resident would not be expected to offer a side payment to dissuade him from doing so. This is because the driver benefits more from using the shortcut than the resident loses.
04

Rights of the Resident

On the other hand, if the resident has the legal right to block the driver from using the shortcut, he could demand a fee from the driver that is more than his harm of $7 and less than the driver's benefit of $12 for him to use the shortcut. This would be a win-win situation as both would end up better off. But it seems more likely without such payment, the truck driver would stay on the highway.

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