Friday, March 2, 2012

Turbine Noise and the Coase Theorem

One of the topics that I talk about in Principles of Microeconomics is the Coase Theorem. The Coase Theorem basically says that under unique conditions (clear assignment of the property right, small number of parties involved, small bargaining costs, among others) that bargaining (and not the government) can lead to an optimal allocation of an externality. Coase used an example of noise pollution in his seminal article to show how bargaining can increase social welfare over a court decision, by allowing the parties involved to negotiate what each side is either willing to pay to infringe upon someone's property right or willing to accept to have their property right infringed upon.

The New York Times reports an interesting application of the Coase Theorem, Caithness Energy is offerring to pay residents in Oregon (who have the property right to low turbine noise) $5000 if they will sign a waiver saying they will not complain about the turbine noise.

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