Final Paper

ENVIRONMENTAL
ECONOMICS
Carlos Emilio Gonzlez Rivera

K1596001
2016/02/03

Final paper
Coase Theorem
Regarding the Coase Theorem, in many cases it was considered that when a company is causing
some kind of damage to another company (or society), the damaging company should be
considered fully responsible for it, and that measures such as taxes or compensations (to cover all
the damage caused by the first company) were acceptable solutions, but this is not optimal. Now
what happens is that if the damaging company decides to, for example, reduce all the pollution
that is inflicting by reducing the production, that company will stop perceiving the income and
profit for that production, and in the end, it will be incurring into damages (losses) too.
So if the optimal solution is not making the damaging company fully responsible or liable for the
damages, then the optimal solution should be the one that is better for both parts. Now the
advantages for this kind of perspective is that both parts take into consideration cost of
opportunity, and income perceived so after negotiating they can define the best conditions for
both parts. This kind of negotiations may exist in different ways, like the damaging part paying for
optimal damage to affected part, or the affected part being the one paying to the damaging part
for reducing this damage. When both parts negotiate they reach a point in which the benefit of
their activities is optimal (whether they have to pay a compensation to other part or not), so they
dont necessarily have to abandon whatever activity they are doing, but just pay some sum of
money to the other part to compensate the damage caused.
For example, in the original papers of the Coase Theorem, there was an example about a cattleraiser and a farmer (crop production) in which by increasing the cattle would affect the farmers
crops (loss because the cattle eats the crops). So they negotiate (whether the cattle-raiser pays or
is payed), so both of them can maximize their profits, by reducing the cattle, or paying for not
cultivating a specific part of land. Now in my opinion there are some flaws in this kind of
negotiations. Only each company can know their optimal production, the market price and cost. In
this kind of negotiations it is easy to use strategies to get a better deal, or compensations. Lets
say a company can lie about producing a high quantity of X product (even though it is not
profitable for them), just to get a compensation for reducing the amount of that production. It
depends a lot in companies moral too, because in my opinion the possibility of cheating in this
method is likely too.
Tragedy of commons
The tragedy of commons basically explains how humanity (human activities) behaves when they
encounter a common (something like a public good) and in most cases (known for humanity) these
resources or commons are limited. But because of human nature, there is always a desire for
unlimited benefit with limited resources (commons). The interesting part of this is that it is
believed that the individual way of thinking of humans may lead to a social behavior, sometimes in
a positive way and sometimes in a negative way.

For example, lets say there is a common in which a society can find some kind of benefit or profit.
Because of human nature, there is a tendency of considering personal benefit first, and not
considering the effects of exploiting it in an excessive way. So what happens is that according to
every person, increasing their own benefit is better, and if they compare the gain with the loss (or
negative impact in the common), the gain is always higher. But what they fail to realize is that the
collective way of actions like that, lower the gain or quality of the common, bringing ruin to that
kind of system.
Regarding the environmental part, it is widely known that environment cant be analyzed or
treated as a private good, because everyone has access to air, rivers, lakes, sea, between others.
But if we take the same logic we described before, companies are going to discharge their wastes
(bringing them benefit), considering the negative impact is not so important compared to the
benefit gained. Now we know that this collective behavior is the one destroying many natural
resources in present. So if commons cannot be treated as private goods, the only way of
controlling this behavior is through laws or taxing devices that force companies to purify or treat
their wastes before discharging them.
This doesnt necessarily means that no discharging is allowed, or in the previous example no
exploiting of the common is allowed. In fact there is an acceptable level of exploiting, or an
acceptable level of pollution, an optimal point. The biggest challenge in my opinion is reaching
this optimal point taking into consideration that there are many parts involved (companies), and
that makes it more complex.