Topics in Microeconomics - Essay Example

TOPICS IN MICROECONOMICS By Location Essay Property rights dictate who owns what and the liberty that theowner of the property has to deal with his property. It is prudent that the owner of a property is compensated for dilution of his right. Moreover, it is in order that the property rights owner is accorded the privilege to transfer the property rights to the highest bidder. The failure by the economic systems to assign property rights to resources gives rise to externality (Stern, 2006). The lack of clearly defined property rights means that externalities cause market failure and hence by allocating property rights to the use of natural resources, regardless of who holds these rights, will protect these resources better than government intervention.

The coarse theorem is very applicable to the concept of economic allocation in the presence of externalities. The theorem requires that if there is trade in externality and with no transactions costs involved, bargaining will automatically lead to efficient allocation of the property. However, the Coasian concept cannot be applied in the absence of property rights. It is worth noting that a market is a system where players exchanges both commodities and rights. It is therefore prudent to take note that the use of commodities in the market is pegged on the concept of property right (Brown, 2003).

The market system is therefore organized in such a way that property rights attached to the commodities in question dictate the control of the commodities. Pigovian tax is critical in the sense that it helps to address the problem of social costs. Pigovian tax ensures that each firm or individuals who utilize natural resources meet the social cost involved. Coase (2003) asserts that the reason for the market failure is largely attributed to the fact that the rights of commodity use are always incomplete resulting to either positive or negative externality.

Positive externality is a benefit accruing to an individual who has no rights over the use of a property. On the other hand, negative externality occurs when a third party incurs social costs over the use of certain commodity. According to Stern (2006), property rights needs to have excludability and transferability; excludability is the ability of the owner or agent of the property to control the use of the commodity while transferability refers to the ability of the owner to transfer rights to use a property to another party.

The coarse theorem and Pigovian theorem, therefore, goes a long way to ensure that they protect the resources from overexploitation or pollution by individuals or firms. References Stern N. 2006. The economics of climate change. New Jersey: Willey and Sons Taylor, J. and Weerapana, A., 2011. Principles of Microeconomics. Boston, MA: Cengage Learning. Brown, J. 2003. Toward an Economic Theory of Liability. Journal of Legal Studies 2 (2): 323– 349 Coase, R. H. 1973. The Problem of Social Cost.

Journal of Law and Economics 3 (1): 1–44. Essay 2 Climate change is a serious and rampant global challenge that requires the input of all nations in addressing it. There is urgent need for concerted efforts of international response and national efforts to reduce greenhouse gas (GHC) emissions. The international community has made efforts to reverse this ugly trend by setting up The United Nations Framework Convention on Climate Change (UNFCCC) whose main mandate is to respond to climate change.

The UNFCCC has fronted the use of creation of a market for tradable pollution as a measure to mitigate against the adverse effects of pollution (Jehle & Reny, 2001). The creation of a market for tradable pollution permits can achieve the socially desired pollution level by putting the responsibility for pollution control decisions into the hands of polluters themselves. The creation of market for a tradable pollution is therefore the most viable way of attaining the recommended levels of pollution in the globe.

Hirschey (2008) asserts that the concept means that industries have to purchase permits, which allows them to pollute the environment to certain levels. The more levels of pollution the industry emits, the more it has to pay in terms of the pollution prices. The objective of every industry or any firm is to maximize profits and reduce costs; this implies that the industries will try to keep their levels of pollution to optimal level to cut on their costs. Research shows that 60% of greenhouse emissions, which are responsible for global warming and climate change, are caused by industries (Taylor & Weerapana, 2011).

The diagram below gives a succinct figurative overview of how the concept of price and demand comes into play with regard to the market for tradable pollution. The price of pollution is a cost to the industries and the more they pollute the higher the price they pay (Gilles, 2004). This therefore means that the companies will pollute less (less demand for pollution) to avoid the cost. For instance, since the price of pollution is pegged on at P2 the industries would prefer to only demand o pollute the environment to level Q2 as shown in graph 2 Graph 1: Illustrates the effect of setting up a price on pollution on the levels of pollution demanded by firms (Source: http://www.imf.org/external/pubs/ft/issues/issues25/) By increasing the prices of tradable pollution, the demand to for pollution will drop significantly.

The various policy makers must consistently ensure that this policy on creation of market for tradable pollution is implemented fully so that the levels of pollution to the environment drop significantly. The concept of a market for tradable pollution ensures that the industries incur the external cost of pollution to the environment. References Taylor, J. and Weerapana, A., 2011. Principles of Microeconomics. Boston, MA: Cengage Learning. Gilles, G. 2004. The Invisible Hand Formula. Virginia Law Review, 80 (5): 1015–1054.

Hirschey, H. 2008. Fundamentals of Managerial Economics. Boston, MA. Cengage Learning. Jehle, G. & Reny, P. 2001. Advanced Microeconomic Theory. New York: Prentice Hall Inc.