The Clean Air Act instituted trades between states for SO2 emissions. Several ut
ID: 1207439 • Letter: T
Question
The Clean Air Act instituted trades between states for SO2 emissions. Several utility companies across geographic borders have engaged in such trades in recent years. Consider a trade between a utility in Wisconsin and the TVA in Tennessee. Assume that the trade reduces Wisconsin electricity consumers’ bills by a total of $ 1 million, and lowers Tennessee electricity consumers’ bills by $ 500,000. Also assume that the trade improves local environmental quality in Wisconsin by an amount that people value at $ 2 million. If the local environmental quality in Tennessee declines as a result of this trade, then indicate a potential Coase agreement that could avoid the environmental decline and would still make the trade profitable to both parties ? Is such a trade possible in this scenario ?
Explanation / Answer
yes, it ca be possible to make an agreement between the firms. Coase agreement says about the economic benefits of both the firms, and it states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property.