Chapter 16

EXTERNALiTIES, PROPERTY RIGHTS, AND THE COASE THEOREM
Boiling Down Chapter 16
Economics would be much more precise and the models would be better predictors if property rights were easy to define and enforce and if there were no externalities to distort cost-benefit analysis. However, there is reason to believe that some of the problems that seem so difficult for markets to deal with can be partially solved by low-cost negotiation between the affected parties.
The secret to understanding how markets can mediate externality and property right problems is to recognize that all these problems are two-sided issues. First, the perpetrator of the problem has her interests in the matter, and second, the one being harmed is also seeking a solution. Since accom­modation by one or the other is needed, it is important to find out who can most easily accommodate or solve the problem. If Bill can solve the problem at lower cost than Joe, then there should be incentives for Bill to implement the solution.
If the problem is noise pollution in production, as your text illustrates, then the solution comes in either making less noise while producing or insulating oneself against the noise. The interesting part of this problem, as Ron Coase pointed out, is that voluntary negotiations between the affected parties will result in the least costly solution to the problem no matter how society defines liability for the noise. This is certainly true if negotiating costs are zero and often true if negotiating costs are positive.
The analysis is rather simple. If the noisy production process provides society more benefit than harm and the business does not have airwave rights, then the business can compensate those harmed and still have a net gain. If they already have the airwave rights the offended party will absorb the cost that the noise creates. Thus, no matter who has the property right to the sound waves, the efficient outcome results. Of course, each party will want to have the property right because such ownership will mean that he gains income. In other words, property right definition affects income distribution but not the efficient allocation of resources.
Not only will the noisy production process continue regardless of who is liable for the noise, but the least costly way of coping with the noise will be found. Obviously, if it is cheaper to insulate the factory than to pay the offended party, the factory will be insulated and the problem will be solved at less cost than the alternative method of a noise payment. If the offended party can insulate itself cheaper than the factory can insulate against noise, then it would be to that party's advantage to do so and pocket the difference between the compensation payment and the insulation cost. Efficiency is served in the long run as long as the negotiation costs of these deals do not wipe out the gains that would result from the negotiations.
If negotiation costs prevent the optimal outcome from occurring, then the best chance of reaching efficiency will exist if the liability is placed on the party with the least costly solution available. In such a situation, if the noisy production process can be made quiet inexpensively and if the of­fended party would have a difficult time insulating against the noise, then the liability for the noise should rest with the factory because the factory will be better able to solve the problem and bring about the efficient outcome. If the liability rests with the offended party and if it is costly for that party to negotiate a deal whereby he pays for the factory's quieter equipment, then the noise will persist and societal welfare will be less than it could be.
Public policy usually reflects these principles of property right assign­ment. Airlines absorb costs of planes' landing and takeoff noise by having restricted runway times, since that restriction is less costly than neighborhoods' not being able to sleep. At the same time, planes are allowed to fly over my house at 20,000 feet anytime because it is nearly costless for me to ignore the faint noise that might upset my tranquillity. Trespass laws, in general, allow trespass if the cost of not trespassing is very high, whereas no-trespassing laws are common where low-cost alternatives to trespassing are available. Likewise, zoning laws prohibit behavior that brings costs to neighbors that exceed the benefits to the person building a new structure.
An associated externality problem concerns resources held in common and used for free. In these cases, users calculate only their private costs and not the costs that they impose on others because they are congesting the public property. If I drive on a public road, I do not consider the cost I impose on fellow drivers who now have one more car to wait on. If I graze my cattle on public land, I ignore the fact that other herds have less to eat and will sell for less in the market. In short, the tragedy of the commons is that people compare the average benefit with the marginal private cost of an action and, in so doing, overuse the resource. Unless policy can find ways through privatizing the resource or charging a user fee to make private benefits and costs equal social benefits and costs, the resources held in common will be overused and exhausted prematurely.
In many areas of life it is impossible to negotiate an efficient outcome where interests conflict. In these situations, general rules are made that attempt to prevent misallocations, but no rules can bring complete efficiency when circumstances are varied. Consequently, free speech is valued but often abused, and smokers have restricted areas to smoke in instead of the opportunity to buy off the nonsmoker who is offended by smoke. These examples of negative externalities have parallel cases where positive exter­nalities exist. Where your actions benefit others, it will be desirable for you to be compensated for those benefits. Without proper compensation you will not provide the optimal amount of benefit to society.
The last kind of externality discussed in this chapter is the positional externality. In these cases people strive to get ahead but often succeed only in forcing everyone else to expend similar effort to maintain position. This process, often referred to as a contest, can involve great resource expendi­ture with little or no gain in position. If one does gain position, the other contestant will necessarily lose. This loss can be viewed as an externality to the opponent's gain. Public policy in these situations can best be directed toward establishing rules of the contest that allow for competition without excessive cost. An example of this can be seen in the horsepower restrictions imposed by auto racing governing bodies or in NCAA rules governing competition in college athletics. In many cases people's preferred action is ideal only if everyone else acts in the same way. Restricting overtime work hours, forcing people to save for retirement, or requiring uniform safety standards in the workplace can prevent competition for higher relative standards of living. Such competition is futile because it absorbs resources preventing people from achieving the leisure, retirement savings, and workplace safety they really desire.
Before Coase, the preferred tool for dealing with negative externalities was taxation. If the tax was equal to the externality, efficiency could be maintained. If the tax exceeded the cost of avoiding the externality, the offender could always eliminate the externality and efficiency would exist. Only if negotiation costs are positive and the victim has the least costly way of avoiding the externality is taxation a less-than-efficient solution to the externality. Because luxury goods are often positional in nature, and because positional goods impose an externality on others when they are purchased, it would be wise to tax them substantially to reduce their consumption. Their positional value would not be affected, and the government could raise revenue with less difficulty.
Chapter Outline

• Externalities provide a benefit to one person, while they harm someone else.
• When parties affected by externalities can negotiate costlessly with one another, an efficient outcome results, no matter how the law assigns responsibility for damages (Coase theorem).
• If the confectioner is liable, but cannot stop the noise of his operation as easily as the doctor can insulate against it, the confectioner will pay the doctor to insulate.
• If the doctor does not have rights to silence, then he will insulate on his own.
• When negotiating costs are positive, the most efficient laws place the burden of adjustment to the externalities on those who can accomplish it at least cost.
• Planes flying overhead or swimmers walking on beach property are examples of activities that continue because of efficient laws.
• Zoning laws on building heights and the rightful use of another's harbor in a storm illustrate how laws seek to be efficient.
• When property rights are not defined, individuals use the resource until their average return equals their marginal cost.
• Grazing on common pastures or fishing in common ponds show how this lack of property right definition leads to overuse of a resource.
• Unrestrained speech and smoking in public are further examples of instances where rights are hard to determine and negotiation is difficult.
• The Coase theorem also applies to positive externalities since people will pay for external benefits if necessary.
• Positional externalities, like those involved in arms races, athletic competitions, overtime work, consumption level competition, or workplace safety, may require laws to bring about desired outcomes.
• Efficient tax policy can help in the proper allocation of resources where externalities exist.
• A good tax will result in those with low-cost cleanup methods doing most of the cleanup.
• A tax on positional externalities like luxury purchases may be preferred by everyone since there may not be losers and the public revenues would be enhanced.

 

Important Terms

externalities	tragedy of the commons
negotiation costs	positive externalities
Coase theorem	negative externalities
commons	positional externalities

A Case to Consider
Since Rodney and his disco bar moved next to Megan’s store, all has not been well. The main problem is that the bar creates loud music that disturbs Megan and her customers. The graph below shows the costs and benefits of the music and the sound abatement measures for both Megan and Rodney. The horizontal axis shows the sound levels in decibels and the vertical axis measures utility and cost in dollar equivalence.  Use the graph to answer the following questions.
$                                                                                              Marginal cost of
absorbing music
Marginal benefit of extra                                                   noise for Megan
decibels to Rodney                                                    
Megan’s cost if she
soundproofs

                                A
B                                                        Marginal cost of
C                               soundproofing for Rodney 

 

   O                            D     E         F                                           Z     Decibels     

• If the city does nothing to stop Rodney (lets him have the air property rights) and Megan can costlessly negotiate with him, what will they end up doing?

 

 

 

 

• What will happen if the city tells Rodney that they will revoke his license to operate if he disturbs his neighbors and they complain? Assume again that negotiation costs are zero.

 

• What is the moral of this story so far? (check Coase theorem)

 

• If it is impossible to negotiate deals and Rodney has the air property rights, what will the outcome be?
• If Megan has the air property rights and negotiation costs are prohibitive, what will the outcome look like.

 

 

• What is the moral of questions 5 and 6? (check Coase theorem again)

 

 

• What would happen if the city auctioned off the air rights in that locality and Megan and Rodney were the only bidders?

 

 

 

Multiple-Choice Questions

• You will be paid if someone runs a high-tension electric wire over your land but not if a plane flies over your property at 20,000 feet. This is primarily because
• planes cause no negative externalities at that height.
• it is more costly to identify damage and negotiate with the airlines than to negotiate with the electric company regarding the damage of electric wires.
• airplane noise is intermittent while electric wires are constant.
• airlines have more political power than electricity companies.
• When noise pollution is created, the perpetrator is not held liable, and negotiation costs are 0, then the pollution
• will likely not be stopped no matter how offensive the noise is to others.
• must be solved by the offended party's insulating itself against the noise if the cost of insulating is less than the aggravation.
• will be solved by the least expensive method available even if that in­volves the noisemaker's changing operating methods.
• will be solved only if the government passes regulation.
• If I am willing to spend $50 a year to convince the city to solve a parking problem on the public road in front of my house, and if negotiation costs of all kinds are 0, which of the following would best serve my interests?
• The city puts a "no parking" sign up without any lobbying on my part.
• The city transfers to me the property rights to the parking area in front of my house but will not put up "no parking" signs.
• The city installs parking meters with $10-per-hour rates to discourage parking in front of my house.
• The city does nothing.
• It is efficient if property rights are given to the party that has the most difficult time correcting an externality problem. This statement is
• always true.
• never true.
• true only when negotiation costs are positive.
• true only when negotiation costs are 0.
• Regulatory rules identifying certain specific anti-pollution actions are effi­cient when
• the rule applies to the party with the least costly way of solving the problem and the specified solution is the least costly way of solving the problem.
• the rule applies to the party with the most costly way of solving the problem.
• negotiation costs between the offender and the offending parties are 0.
• none of the above are true; they can never be efficient.
• Which is true about the taxing of externalities like pollution? Assume the tax is an amount exactly equal to the least costly way of cleaning up the pollution.
• If negotiation is costless, taxing the polluter will lead to the efficient outcome.
• If negotiation is costly, taxing the polluter will result in an efficient outcome if the polluter has the least costly way of reducing pollution damage.
• Taxing the polluter will lead to an inefficient outcome if negotiation is impractical and the victim has the least costly means of avoiding damage. Assume no government subsidy to the offended.
• All the above are true.
• Which could not be an efficient solution to the problem of my neighbor's playing loud music that I hate but can hear clearly through the wall of my apartment?
• My neighbor's shutting down her stereo
• My enduring the noise
• My insulating the wall
• My neighbor's insulating the wall
• My playing music we both hate loudly enough to ruin her atmosphere
• If my neighbor's cow keeps getting into my cornfield and eating my crop and a fence is the easiest way of solving the problem, who should build the fence if efficiency is the only concern and the fence cost is the same for both parties?
• My neighbor should.
• I should.
• It makes no difference who does as far as efficiency is concerned.
• The government should.
• In the case described in question 8, the government passes a law that says I can protect my property any way I choose. The cheapest way for me to protect my corn is to shoot the cow if it gets into my corn. Which of the following scenarios would not be efficient?
• I charge the cow owner for the damage each time the cow gets into my corn. The owner pays if the accumulated damage is less than the cost of a fence.
• The cow owner sells the cow if the fence cost or the damage payment is more than the cow is worth.
• I shoot the cow no matter how valuable the cow is to my neighbor because that is the lowest cost way for me to solve the problem.
• All the scenarios above are efficient.
• None of the above are efficient.
• Most community laws require that lakeshore property owners allow other people to trespass on their beach property, but they do not require cottage owners to permit trespassing on their lawns. According to your text, this is because
• lakeshore owners tend to be more community-minded than city dwellers.
• beach property is not very easy to destroy.
• negotiation costs would be much higher with cottage owners than with lakeshore owners.
• the cost of not being able to cross a person's beach is much higher than the cost of not crossing a cottage lawn.
• Courts will often decide damage suits using the rule that
• the correct outcome is the one that the parties would have arrived at had they had time to negotiate an agreement on their own.
• property rights provide absolute rights that cannot be violated or sold.
• liability is assessed if the damage is large.
• people should avoid any situations that could lead to damage.
• In a village where common pastureland is the source of income for the citizens, it is normal for the farmers to
• add more cattle to the pasture until the average product received by the farmer is equal to his opportunity cost of adding the cattle.
• add more cattle to the pasture until the marginal product to society is equal to the opportunity cost of adding the cattle.
• add more cattle to the pasture until the marginal product received by society as a whole is equal to the average product of grazing.
• graze less cattle than would be grazed if the land were privately owned.
• My neighbor loves my music and benefits every time I turn up my favorite music. Yet he never buys me a CD. According to Coase, if we could costlessly discuss the situation, we would
• find a way for my neighbor to buy his own system so I could hear his music also.
• buy a portable system between us that we could trade back and forth.
• come to an agreement where he would buy CDs occasionally for me and I would play more music.
• come to an agreement whereby I would play more music than I would normally play so his benefit could increase at no cost to him.
• Which of the following is a positional externality?
• Ford advertises and Chrysler loses market share.
• A farmer's apple trees provide pollen for a hive owner's bees to make honey.
• A paper factory pollutes the community.
• All the above are positional externalities.

15.  Climate change is likely caused by emissions from cars, factories, and nature itself. The externalities of pollution from human activities could be stopped by laws, regulations, incentives such as tax credits or cap and trade property rights. All these are tried, but still pollution continues happening all around. Why do these efforts seem to fail?
a.   Climate externalities are frequently hard to measure.
b.   Climate externalities have long-term effects requiring discounting where discount rates and time preferences will vary a great deal among people.
c.   Some people believe that dealing with the damage as it occurs is more efficient than trying to prevent it.
d.   All of the above are true.

• Academic deans and department chairs receive requests from people in business who are seeking a career change into academia. The reason often given is that they are tired of working 80 hours a week away from home and would rather have a different lifestyle. Given this information, which of the fol­lowing statements is clearly false?
• These people would probably favor a requirement that would make long workweeks an exception rather than the rule.
• There are positional externalities to long workweeks in a firm.
• The cost of career climbing is starting to exceed the benefits for these workers.
• These workers are not willing to give up good ratings and promotions in business for family time, so they seek an environment where family time and work esteem are not mutually exclusive.
• None of the above are clearly false.

17.  Which of the following is the most credible argument against a Coase market solution to externality problems?
a.   Negotiation costs are hardly ever zero.
b.   There are no solutions to some externality problems.
c.    People are ignorant of the costs they experience from pollution.
d.   Governments do not have authority to determine property rights in many pollution cases. 
Problems

• When I was a small boy, my neighbor had a garden next to our property. To prevent birds from eating his crops, he installed a shooting device that shot blanks every few minutes. Although it scared the birds away, it also was a very undesirable practice from the point of view of my family. The possible solutions to the problem included the following:
• We could have lived with the noise at a cost of $100 of irritation per growing season.
• He could have stopped the shooting and absorbed $200 in lost crops.
• He could have put a $50 scarecrow in the field and saved half of the crop losses.
• We could have bought ear plugs for $10 and suffered a $50 loss be­cause of the inhibited communication.

• If he were made liable for damages for his actions and transactions costs are 0, explain what solution would result.

 

 

• If he were not liable for his actions, what solution would result?

 

 

 

• If you were concerned with efficient outcomes and were a judge deciding how to solve the case of the noisy gun, what would you rule regarding liability if negotiation costs are $150?
• Is the most efficient solution (presumably you, as judge, will find it) also most fair in your opinion? Explain.

 

 

• If you have questions about the fairness, can you propose a policy solution to that problem without introducing inefficiencies? Explain.

 

 

• In this chapter the issue of negative externalities has made the concept of Pareto optimality unworkable. Is this true or false? Explain.

 

 

 

• Give some thought to the concept of externalities. When an aggressive sports owner starts paying super high salaries that cause other owners to lose money, is that an externality that the first owner should be required to pay for? Any competitive move or innovation puts costs on other competitors, but it also drives the system toward overall improvement. Can all these externalities, both positive and negative, be considered? How practical is the notion of negotiation in the Coase theorem? Can you give actual cases where you observed negotiated settlements working? The story in the text of a "safe harbor in a storm" implies that the notions of efficiency and negotiation costs are imbedded in many areas of the law. Can you think of other legal cases where efficiency is a guiding principle? The malpractice and product liability cases suggest something is at work that builds in full costs of one's actions. Are there externalities to legal judgments themselves, since our legal system works on the notion of precedence? There are not clear answers to most of these comments and observations, but the list of questions could go on. Add a few of your own below for class discussion.

 

 

• Students prefer a policy of no extra-credit work in a class where I grade on a curve, but where no curve is used, they clamor for all kinds of extra­ credit options. Does this make sense?

 

• Each citizen in a small town suffers 1 unit of irritation for each bushel of leaves burned in the town. The charge for hauling a bushel of leaves to the dump is a fee equal to 20 units of irritation. There are 25 people in the town, each of whom minimizes personal irritation, and each has 10 bushels of leaves.
• If there are no restrictions of any kind on burning leaves and negotiation costs among citizens are prohibitive, what will happen to the leaves in the town?

 

• What is the marginal cost to society of a bushel burned?

 

• What is the average cost to the individual of each bushel burned?

 

• How much total irritation will each person experience? Is this the most efficient solution?

 

• If each leaf burner had to pay the affected citizens to cover the irrita­tion cost, would the burning decision change? Explain.

 

• If the citizens paid a $10-per-bushel tax on each bushel burned, what effect would the tax have on the actions of the citizens? If the tax were $19.50, would your answer change?

 

 

• If you were running for mayor of the town and campaigned for a leaf-burning prohibition in the town, what do you think the response of the residents would be? What is the moral of the story that relates to the problem of the commons?

 

• "If every fur coat in the world suddenly evaporated and the equivalent value of money suddenly appeared in the local school board's budget, the world would be far better off." This statement was made with the knowledge that the fur coat owners valued their coats greatly. Why might the rich fur coat owners also agree with this statement? (Assume that lower social classes are not impressed by fur coats.)

 

• Our football team is not allowed by conference rules to start practicing before August each year. Why should the conference restrict the freedom of the college if the college is willing to finance an early practice and the players are eager to practice? Explain using language from this chapter.

 

• Years ago, before smoking was banned on all airplanes, this paragraph appeared in a story in the Wall Street Journal.

Ken and Marcia Norgaard won't walk a mile for a Camel, but they will fly 740 miles out of their way and pay an extra $600 for their two-pack-a-day habit.
This response to the smoking ban on domestic flights raises the question of whether a smoking ban is efficient or not. Write an essay describing why you think the present efforts to outlaw smoking in public places are the most efficient solution to smoking externalities, or write an essay proposing an alternative policy suggestion to solve the smoking problem in public places.
9.   Al Gore has been a strong advocate of immediate action on the global climate issue. However, he lives in large house which uses considerable energy. When challenged about this he claimed to have purchased enough pollution rights to cover his energy usage. Critics argue that the market for pollution rights as practices in the cap and trade plans give the rich opportunity to go on their merry ways polluting while the poor who can not afford to buy such rights must do all the conserving. Evaluate this argument from a market perspective.

 

 

Answers to Questions for Chapter 16
Case Questions

• Megan will pay Rodney FCZ to turn the music down to OF and she will pay him OFC to install the soundproofing necessary to keep the OF decibels from disturbing her.
• Rodney will spend OCF to soundproof and will play music up to OF decibels.
• The first part of the Coase theorem. With zero transactions cost the outcome will be the same no matter who has the property rights.
• Rodney will put his music on full blast and Megan will absorb the full soundproofing costs under her cost of soundproofing function.
• Rodney will play his music to OF and spend OCF to soundproof.
• The second part of the Coase theorem. If transactions cost are not zero, give the property rights to the person with the highest cost of soundproofing.
• Since Rodney would not bid more than OCZ, Megan will outbid him by $1 more than that and get the property rights so efficiency will be achieved.

Multiple‑Choice Questions

• b, The higher the negotiation costs, the less likely it is that externalities will be addressed and resolved efficiently.
• c, This is because the offended party will pay the offender to solve the problem if the offender has the least costly solution.
• b, I can now charge a fee $1 more than my inconvenience, which will serve my interests best. The interests of the public may not be served well with this result.
• a, The least costly way of solving the externality problem will then be used. 
• a, The probability of the second part of this statement happening is low, so coercive regulation is often not efficient.
• d, Item (c) is true because there is no incentive to have the victim do the clean-up.
• e, This would make everyone worse off even though it may bring perverse satisfaction. However, it may lead to some sort of a cease-fire that is preferred to the initial state.
• c, Only distribution issues are important in the decision because efficiency is served.
• c, If the fence cost < cow’s benefit, shooting the cow is inefficient and some method of allocating rights should be found that promotes efficiency.
• d, This is a case where law is based on economic efficiency rather than innate rights.
• a, Read the safe harbor story in your text.
• a, Farmers have no incentive to count the cost their cow inflicts on other farmer’s cows who now have less to eat.
• c, He needs to pay for the external benefit he receives, so the service is optimally provided.
• a, The apple trees have a positive eternality and the factory imposes a negative externality, but only Ford's behavior is truly positional in nature.
• d, This problem points out some of the difficulties in working with externality problems.
• e, There is a positional problem in worker advancement. Finding a work environment where the competition for position does not involve as much travel is an answer for some.
• a, the answer to this problem could be debated, but letter a is clearly true whereas the rest would need further clarification.

Problems

• a) The neighbor would pay us $60.
• b) We would buy earplugs.
• c) The most efficient solution is that he is not liable for the noise.
• d) This decision hardly seems fair because he was causing the problem.
• e) Perhaps the local government could fine him $60 and pay the $60 to us.
• False, because the loser can always be compensated by the gainer so that both gain.
• The medical or legal areas offer interesting problems that are very timely.
• Yes, positional concerns make students want a rule to prevent an extra‑credit competition.
•   a) All the leaves will be burned.

5.    b) 25

• c) 1
• d) The 250 units of irritation is not the most effi­cient solution.

5.    e) Yes, the citizens would now haul all their leaves and pay 20 per bushel instead of 25. .
5.    f) The $10 tax would not change the decision, but the $19.50 fee would because (1 + 10) < 20 but (1 + 19.50) = 20.50 which is greater than 20.
5.    g) The citizens would vote for you because they would rather have everyone haul leaves.

• Positional externalities mean that the wealthy are no worse off relative to their peers, and they are better off absolutely, because of better education in the community.
• Positional externalities explain why all teams must start practicing at the same time.
• If negotiation costs are low, smoking flights may be more efficient if the Norgaards are typical. They will pay other passengers enough so the passengers will voluntarily allow the Norgaards to smoke. However, the negotiation costs of having another cumbersome step in boarding an airplane are likely far too high to make compensation payments possible.
• The critics have a point, but the same point could be made about all other commodities purchased. The rich simply have better access to resources than the poor in a market system and the only justification for this is that markets work better than other alternatives even for the poor. However, issues of fairness and justice are part of the discussion in any social order and sometimes some restrain on the rich and redistribution toward the poor strengthens the social glue. The next chapter deals with some of these issues.

 

 

Helen’s neighbor Sam has a basketball net with floodlights in his driveway near Helen’s house. Every evening there are late basketball games creating a substantial disturbance for Helen and her family. The benefits and costs of the activity for Sam and Helen are shown in the graph below. Also shown are the costs of Sam building a fence that would prevent the annoyance, Helen’s cost of installing protective curtains, and Helen’s cost of living with the noise and lights. Answer the following six questions based on the graph below.

                                               Intensity of Noise and Light From the Basketball Games

• If transactions costs are zero and Sam is violating no city ordinance how Intense will the games be and what will both Sam and Helen do? (Use letters to identify areas and locations on the graph.)

• If transactions costs are zero and if the city ordinance forbids such noise, how intense will the games be and what will Sam and Helen do? (Describe what happens and show costs and benefits. (Use letters to identify areas of costs and benefits.)

• If transactions costs are prohibitive and no city ordinance is violated, what changes, if any will occur from your answer to number 1 above?

• If transactions costs are prohibitive and if the city ordinance forbids such noise, how will your answer differ, if at all, from number 2 above?

• What does this exercise tell you about the Coase theorem?

 

6.   List some factors that might cause transactions costs to be high in this case.

 

 

• Because no one gets grades in the high 90s in your class, your professor routinely takes the top score in the class and adds points until it equals 97. The same number of points are added to everyone’s score. Your roommate is a bright hard worker who often scores 10 points higher than everyone else and he is usually in the low 90s
• If the overall class average times the number of students represents the overall welfare of the class, are there externalities to your roommates brilliance and diligence? Explain.

 

• If there are 10 students in the class and the top two scores are 90 and 93, your roommate’s grade being the highest, what was the effect of your roommates score on the welfare of the class?

 

 

• If your roommate knew all this data before he handed in the test, what should he do if he wanted to maximize the welfare of his class?

 

• Describe in words what the “tragedy of the commons” is.

 

• Why is it a tragedy?

 

 

• How can the tragedy be addressed for the good of society?