Page 359 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes suppose 1 per cigarette. Now the student B can use this money to get fresh air for himself. In
contrast, if student B gets property right then he can say to student A that if he wants to smoke,
he needs to pay some bucks (like 1 per cigarette). Student A can take decision of number of
cigarettes and how many bucks he needs to pay to student B. Student B can take decision on
money as well as the level of pollution.

23.9 High Transaction Costs

Costs theory is based on the assumption that there is no agreement or transaction happens on bargain
process. For example, the above cigarette smoking students, we have assumed that they can make
agreement by sitting in that room. Suppose that if two agents live in two different zones then to contact
each other, everyone will need to pay on telephone, fax etc. In this condition, every agent will assume
his pure profit gain after transaction. He would agree for deal when he gets his profit in positive after
deducting the transaction cost from his agreement. In other words, if the agreement cost is more then
it may be possible then two or all parties do not ready for bargaining, no matter how well-defined the
property right is.
Generally, it has been observed that in externalities, there is more bargaining costs included in profit
or loss. So the private agent does not come for deal. In this situation, government includes for the
perfect solution.
One more negative externality is pollution, and to prevent this, government inclusion is necessary. The
three types of factor which government can use to prevent this are Direct Pollution Control, Emission
Taxes and to Give Permit. Since every factor has some limitation, so it needs to use effectively in certain
conditions.

23.10 Summary

• Park, National Security, Roads, Bridges, etc. are non-rivalrous products. A park, in which everyone
comes and goes and takes advantage to get relax. Thus, the persons of a nation can use the security
provided by national security system.

23.11 Keywords

• Property Rights: Right of Property
• Asymmetric Information: Disequilibrium Information
• Rivalrous: Opponent
• Excludable: Prohibition

23.12 Review Questions

1. What do you mean by Excludable products and market failure?
2. Explain “Communal Property Resource”.
3. What do you mean by externalities and market failure?
4. What is Negative externality? Clarify it.

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