Externalities

Externalities can arise between producers, between customers, or between consumers and producers. They can be negative—when the action of one party imposes costs on another party—or positive—when the action of one party benefits another party. A negative externality occurs, for example, when a steel plant dumps its waste in a river that fishermen downstream

1 Comments

Ways of Correcting Market Failure

How can the inefficiency resulting from an externality be remedied? If the firm that generates the externality has a fixed-proportions production technology, the externality can be reduced only by encouraging the firm to produce less. As we saw in Chapter 8, this goal can be achieved through an output tax. Fortunately, most firms can

1 Comments

Stock Externalities

We have studied the negative externalities that result directly from flows of harm­ful pollution. For example, we saw how sulfur dioxide emissions from power plants can adversely affect the air that people breathe, so that government intervention in the form of emissions fees or standards might be warranted. Recall that we compared the marginal

1 Comments

Externalities and Property Rights

We have seen how government regulation can deal with the inefficiencies that arise from externalities. Emissions fees and transferable emissions permits work because they change a firm’s incentives, forcing it to take into account the exter- nal costs that it imposes. But government regulation is not the only way to deal with externalities. In

1 Comments

Common Property Resources

Occasionally externalities arise when resources can be used without payment. Common property resources are those to which anyone has free access. As a result, they are likely to be overutilized. Air and water are the two most com- mon examples. Others include fish, animal populations, mineral exploration, and extraction. Let’s look at some of

2 Comments

Public Goods

We have seen that externalities, including common-property resources, create mar- ket inefficiencies that sometimes warrant government regulation. When, if ever, should governments replace private firms as a producer of goods and services? In this section we describe a set of conditions under which the private market either may not provide a good at all

2 Comments

Private Preferences for Public Goods

Government production of a public good is advantageous because the govern­ment can assess taxes or fees to pay for it. But how can government determine how much of a public good to provide when the free rider problem gives peo­ple an incentive to misrepresent their preferences? In this section we discuss one mechanism for

1 Comments

The gains from the trade of the firm

1. PRODUCTION AND THE FIRM The firm is not an easy economic concept to define. Everyone accepts that IBM or ICI or Ford constitute ‘firms’, but from an economic as distinct from a purely legal point of view it is necessary to discover what underly­ing principles enable us to refer to such international giants

1 Comments

Institutions and contract enforcement in the firm

1. The Exchange Game The firm as a method of enabling contractors to adjust to change and of encouraging the discovery of new possibilities for mutually advantageous cooperation will be a major theme running through this book. Alongside it there will be developed a different, though complementary, perspective. In section 2 we supposed that

2 Comments

The process of exchange and the fim

All exchange transactions encounter problems of information and enforce­ment. Consider, for example, the process of building houses. Suppose that a person, A, who, for the sake of convenience, we shall call a ‘he’, wishes to build an extension to his home. One possibility is that he will draw up some plans, submit them to

1 Comments

Contracts and information in the firm

Our fictional story of person A’s building project was designed to highlight some of the difficulties everyone encounters  at some time or other in the process of contracting. It is now necessary to look at the issues involved from a more analytical viewpoint. Perhaps the most important point about the hapless A is that

1 Comments

Institutional responses to transactions costs of the firm

Information is costly to obtain. Finding out about the opportunities which are potentially available, about the quality of the goods and services on offer, and about the appropriate responses to various possible future con­tingencies, involves time and effort. The absence of information, as we have seen, can inhibit the process of exchange, but if

1 Comments

Contrasting views of the entrepreneur

1. The Classical Tradition To summarise in a few lines the views of a range of writers spanning more than a century from the time of Adam Smith onwards is clearly a haz­ardous undertaking and one which is liable to result in severe distortions to the work of some economists. As a generalisation, however,

2 Comments

The entrepreneur and the firm

We have now considered in some detail the contribution of those economic theorists who have given the entrepreneur a place of importance in their thinking. There are clearly many different conceptions of the entrepreneur, but complex and subtle as are some of the arguments and distinctions that we have encountered, a few fundamental points

Introduction of property rights: definition and types

1. INTRODUCTION In earlier chapters we have discussed at length the phenomenon of ‘exchange’, but until now it has simply been assumed that exchange takes place in goods or services (or in the x and y of our arithmetical example) and that these goods and services are valued because of some physical or technical

1 Comments

The development of property rights

Thus far, our attention has primarily been confined to describing property rights and presenting a simple taxonomy. Several questions now arise. Can we explain the development of different types of property rights? How will the nature of a person’s rights influence behaviour? Do property rights matter? One possible response to these questions is that

2 Comments

Team production and the classical capitalist firm

Just as the development of property rights in resources subject to conges­tion can be seen as an attempt to achieve efficiency gains, so the develop­ment of institutional structures such as firms can be viewed in the same light. In Chapter 2, the firm as a device to economise on transactions costs was considered in

3 Comments

Alternative structures of property rights

In the last section we focused attention on the structure of property rights characteristic of the single proprietorship. Common observation tells us, however, that, numerous and economically important though such arrangements are (for example, Storey, 1982; Bolton, 1971), the modern economy has developed institutions of far greater complexity. An explana­tion of these more complex

1 Comments

Property rights and managerial theories of the firm

By the early 1960s, the large professionally managed corporation was such a familiar part of the institutional landscape that it began to influence the thinking of economists about the firm. A series of ‘managerial’ models of the firm appeared during these years. They all had the same essential structure. Surpluses could be generated within

2 Comments

Property rights and transactions cost approaches to the firm

1. ‘Ownership’ of the Firm The firm in transactions cost analysis is a ‘nexus of contracts’ as explored in Chapter 2. These ‘contracts’ represent promises between participants in the firm. The ability and incentive of the participants to fulfil their con­tractual obligations will depend upon their assignments of property rights. Within the firm, property

2 Comments