There are 10000 residents living in Lion Mountain, a very small town with little

Question

There are 10000 residents living in Lion Mountain, a very small town with little flatland for residential housing and they all live in very compact units. They lookfor space to build a model town in the neighborhood to relieve the housing shortage problem even though the new locations are all a bit away from the town center where all residents work in daytime. Forsimplicity, suppose there are 1000 residents willing to move to live in satellite town and assuming the rest 9000 residents just want to stay and will not benefit nor suffer from their stay or movement-the town is simply too crowded already Each of these 1000 resident has a value for the satellite town. > 0, where i ' 1000. There are two potential sites for satellite town. One site is called G, an unoccupied green field [no infrastructure, like roads, water supply, electricity, etc], which will cost co for the whole development. Another site, B, is a region which is easier for whole development but now occupied by residents of another town called (BarBari) for doing businesses, which could not operate if the satellite town is developed there. The cost of development there is cB, which is much lower than c, and the value of the business is K 1 State Coase Theorem. 2) Assuming B.B. town has the right to doing business in site B, describe a private solution according to Coase Theorem to achieve social efficient outcome. 3) Suppose 0>v, >1000 To achieve the socially efficient outcome, should the satellite town be built? If so, which site? If no, explain why. Show your argument with information above. for any i = 1, , 1000 4) Suggest two reasons why the private solution you propose in 2 might not work in practice.

Explanation / Answer

1. Coase Theorem is define as the economic efficiency of the allocation of economy or we can say the outcome in the present of the externalities. This theorem describes about that if the trade in the externality if possible there could be sufficient low cost of transction which will lead to the efficiency outcome regardless of the intital allocation.

2. To achive the social efficient outcome the best and important private solution for doing ease of business in site B inculdes the moral codes, business merges or contracts betweent the self interest of the parties.

3. Yes, to achieve the socially efficient outcome, it should built because it will helpful for them to achieve the goal easily and efficently and coase theorm also suggest that.

4. Two reason that the private soulution might not work because of the

Firstly, Conflits that may arise between them who may leave or who may not.

Secondly, the social issues that also effect the whole structure of it.

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