1. What is the Coase Theorem? Explain the relevance of each of the following con
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Question
1. What is the Coase Theorem?
Explain the relevance of each of the following conditions for the applicability of the theorem?
a. Well-defined property rights
b. Low costs of negotiating and enforcing agreements
2. Describe the difference between the logic of market processes and the logic of democratic political processes? How does this relate to the Nirvana Fallacy?
3. What are the conditions for the validity of the Median-Voter Theorem? What types of elections are likely to meet those conditions?
4. What is “appropriative activity”? What is “rent-seeking”? What are the implications of such activities for economic efficiency?
Explanation / Answer
1) Coase Theorm is a legal and economic theory that affirms that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution will be selected, regardless of how property rights are divided.
a) Well-defined property rights :-
b) Low costs of negotiating and enforcing agreements:-
2) The logic of a market process is the process by which the prices of goods and services are established. Markets facilitate trade and enables the distribution and allocation of resources in a society. Markets allow any trade-able item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services and goods.
A democratic political process characterizes a system of government that is “of, by and for” the people. “Of the people” implies that the government is composed of regular citizens. “By the people” denotes that the government is elected by its citizens. "For the people” implies that the primary objective of the government is to act in ways beneficial to the people.
The “of the people” component is established when people run for a public office. The “by the people” happens when people are allowed to elect suitable candidates. The “for the people” bit happens when the government does what is required to keep the public informed on important matters. Some of the principal characteristics and basic tenets of a democratic process are that citizens of a given country get the chance to vote, both figuratively and literally, and that every citizen is allowed to live a life of his choice and is free to say and do what he wants.
“Nirvana Fallacy,” used to describe the belief then dominant in the economics profession that market failures could and should be rectified by government intervention, assumed to be apolitical and effectively costless. The belief was unsound; government failure is commonplace, partly because of politics, partly because of the intrinsic difficulty of many of the tasks that are given to government to perform.
The opponents of the Nirvana Fallacy did not deny the existence of market failures; they just wanted the costs to be balanced against the cost of government intervention. But as the years went by there was a growing tendency among conservatives to regard markets as Nirvana—as self-regulating—and thus to deny the need for government regulation. Alan Greenspan, when he was chairman of the Federal Reserve Board, was a spokesman for this position. It became particularly influential during the administration of the second President Bush, with seriously adverse consequences. The deregulation of the banking industry, which had begun under President Carter and been completed during Clinton’s second term, coupled with extraordinarily lax regulation of the nonbank banks (such as Goldman Sachs, Merrill Lynch, and Lehman Brothers) by the Securities and Exchange Commission (which had the principal regulatory authority over the nonbank banks) under the last chairman appointed by Bush, lax regulation of insurance companies (such as AIG) by state insurance commissioners, lax regulation of Fannie Mae and Freddie Mac by the Federal Housing Finance Agency, and lax enforcement by the Federal Reserve Board and the other bank regulatory agencies of the remaining regulations of commercial banks, were major causes (along with the lax monetary policy of the Federal Reserve in the early 2000s and misleading statements by successive Fed chairmen) of the financial crisis of September 2008 and the ensuing economic downturn—the most serious since the Great Depression.
3) The median voter theorem makes two key assumptions. First, the theorem assumes that voters can place all election alternatives along a one-dimensional political spectrum. It seems plausible that voters could do this if they can clearly place political candidates on a left-to-right continuum, but this is often not the case as each party will have its own policy on each of many different issues. Similarly, in the case of a referendum, the alternatives on offer may cover more than one issue. Second, the theorem assumes that voters' preferences are single-peaked, which means that voters choose the alternative closest to their own view. This assumption predicts that the further away the outcome is from the voter's most preferred outcome, the less likely the voter is to select that alternative. It also assumes that voters always vote, regardless of how far the alternatives are from their own views. The median voter theorem implies that voters have an incentive to vote for their true preferences. Finally, the median voter theorem applies best to a majoritarian election system.
4) Appropriation is a non-violent process by which previously unowned natural resources, particularly land, become the property of a person or group of persons. The term is widely used in economics in this sense. In certain cases, it proceeds under very specifically defined forms, such as driving stakes or other such markers into the land claimed, which form gave rise to the term “staking a claim.” "Squatter’s rights" are another form of appropriation, but are usually asserted against land to which ownership rights of another party have been recognized. In legal regimes recognizing such acquisition of property, the ownership of duly appropriated holdings enjoys such protections as the law provides for ownership of property in general.
Rent Seeking :- When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.
Implications :- Rent-seeking can prove costly to economic growth; high rent-seeking activity makes more rent-seeking attractive because of the natural and growing returns that one sees as a result of rent-seeking. Thus organizations value rent-seeking over productivity. In this case there are very high levels of rent-seeking with very low levels of output.Rent-seeking may grow at the cost of economic growth because rent-seeking by the state can easily hurt innovation. Ultimately, public rent-seeking hurts the economy the most because innovation drives economic growth.
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