# Microeconomics, Module 18, “Externalities” (Chapter 13) The Coase Theorem applies to many social activities. We illustrate...

###### Question:

Microeconomics, Module 18, “Externalities” (Chapter 13)

The Coase Theorem applies to many social activities. We illustrate with study time for actuarial exams.

An insurer provides its actuarial students with 120 hours of study time for each exam. The insurer presumes

that candidates study six months for each exam, so study time is 20 hours a month. Each month has 20 work days, so study time is one hour a day. This is the official schedule, but trading among candidates and

managers change the schedule. The study program allows both managers and candidates to exchange study time among days, as long as they both agree with the exchange. The exchange rate may be 1 hour for 1 hour or any other rate, such as 1 hour for 2 hours; see below.

We use several assumptions to highlight the effect of transaction costs:

• Candidates value study time more than managers do; managers value work more than candidates do.
• Candidates prefer study time closer to the exam date. If the exam date is November 15, candidates prefer an hour of study time on Nov 10 to an hour on June 10. Preferences vary: some candidates prefer to study an hour each day and some candidates prefer to study heavily the month before the exam and enjoy leisure time the month or two after the exam.
• Work pressure is heaviest in mid-May and mid-Nov. Work pressure increases steadily from December through mid-May and from June through mid-November. Work pressure varies: sometimes it is heavy during the off-peak summer months and light during the peak months of April, May, October, and November. (This is not realistic, but it is useful to illustrate the effects of transaction costs.)
• Candidates can trade study hours with their managers. A candidate may offer to trade two hours in February for one hour in early May, since the early May hours are more valuable to candidates than the January hours. A manager may offer to trade one hour in early May for two hours in February, since work pressures are greater in early May. (These trades are in the opposite directions; each party prefers the May hours.)

We consider two scenarios.

• Scenario YY: Transaction costs are zero. Each actuarial candidate trades with his or her manager; no other approvals are needed.
• Scenario ZZ: Transaction costs are high. Each trade must be approved by all the Fellows in the Actuarial Department and by all candidates in the department. Fellows are reluctant to approve trades that seem too favorable to candidates and candidates are reluctant to approve trades that seem too favorable to managers. (We use Fellows interchangeably with managers.)

Homework 1: Which scenario generates greater social welfare? Use the following logic:

• Each trade is done only if it creates benefits for both sides. If a candidate trades two study hours in February for one study hour in early May, the manager gains one hour of work and the candidate gains study time that is more valuable.
• Transaction costs impede trade and create less social welfare.

Homework 2: To reduce the transaction costs but retain department control over trades, two options are

considered:

• Option 1: Trades must be approved by a committee of Fellows, but not by candidates.
• Option 2: Trades must be approved by a committee of candidates, but not by Fellows.

#### Similar Solved Questions

##### Math 125 Spring 2020-12 weeks > Assessment HW-Central Limit Theorem Score: 0/8 2/8 answered • Question...
Math 125 Spring 2020-12 weeks > Assessment HW-Central Limit Theorem Score: 0/8 2/8 answered • Question 6 B0/1 pto 100 Engineers must consider the breadth of male heads when designing helmets. The company researchers have determined that the population of potential clientele have head breadth...
##### Wait two weeks Question 67 Why are lung surfactants important? Surfactants hold the lungs closed when...
wait two weeks Question 67 Why are lung surfactants important? Surfactants hold the lungs closed when exhaling Surfactants help the lungs inflate by causing the baby to work hard to inhale Surfactants help the lungs deflate by causing the baby to work hard Surfactants keep the lung tissue from '...
##### 4 a. y(t)-x(t)cos(t/2 b. y(t)-x(t)cos(') x()cos(21) c. X (ju) 5. The signals y(t) in 4a-4e are...
4 a. y(t)-x(t)cos(t/2 b. y(t)-x(t)cos(') x()cos(21) c. X (ju) 5. The signals y(t) in 4a-4e are passed through a filter with unit impulse response h(t) so that the output is z(t)-h(t)*y(t) . Ifthe frequency response of the filter is sketch by hand the Fourier transforms Z(j for 4a-4e Fromjust obs...
##### This culture type is collaborative, encourages cohesion and job satisfaction through employee involvement. Which type is...
This culture type is collaborative, encourages cohesion and job satisfaction through employee involvement. Which type is it? Multiple Choice socialization market O adhocracy O hierarchy O clan...
##### Plot exact and inexact Fahrenheit- Celsius conversion formulas A simple rule to quickly compute the Celsius...
Plot exact and inexact Fahrenheit- Celsius conversion formulas A simple rule to quickly compute the Celsius temperature from the Fahrenheit degrees 2 points is to subtract 30 and then divide by 2 F -30 Compare this curve against the exact curve C (F-32) n a plot. Let F vary between-20 and 120 with 1...
##### I am trying to figure out which questions were incorrect/ what the correct answers are. My...
I am trying to figure out which questions were incorrect/ what the correct answers are. My professor does not provide the correct answers even after the assignment is completed. I only received 10.8 points and each question was worth 9 points (there are 8 questions total) attachment only has questio...
##### Please answer in as much detail as possible. Thank you. Question 1 Check each FIR frequency...
Please answer in as much detail as possible. Thank you. Question 1 Check each FIR frequency response property statement below that is true and leave blank each false statement. H (eJ is periodic with period TT. If the FIR coefficients are all real-valued, then the frequency response is conjugate sy...
##### Approximate the area under a curve using left-endpoint approximation Question Given the graph of the function...
Approximate the area under a curve using left-endpoint approximation Question Given the graph of the function f(a) below, use a left Riemann sum with 4 rectangles to approximate the integral So f(x) dr. 00 7 6 5 4 3 N 1 2 3 Select the correct answer below: BI Ne...
##### B. How does increasing the initial velocity of glider 1 change the final velocity? c. Plot...
b. How does increasing the initial velocity of glider 1 change the final velocity? c. Plot in the graph paper below the graph vf(m/s) versus v1,i(m/s) using the indicated scale. d.Determine the slope of the function vf versus v1,i. e.Compare the experimental slope found in the previous question with...
##### 4) (4 points) Suppose that v(d)=8Vd tells us the speed of a ball in feet per...
4) (4 points) Suppose that v(d)=8Vd tells us the speed of a ball in feet per second after it has fallen d feet from the top of a building. Find v(25) and v'(25) and carefully explain what they mean with a sentence or two. Your explanation should make sense to someone who doesn't understand c...
##### II Problems (4 points each) 7. Assume you are the consultant of an online movie-rental company....
II Problems (4 points each) 7. Assume you are the consultant of an online movie-rental company. Suppose th year cash flow assoc stay with the company for 3 more years generating an annual cash company has a 30% chance of retaining a new subscriber. Given a 12% discount rate, what is the expected val...
##### In 1930, the average cost for a gallon of gasoline was $0.25. In 2007, the average cost for a gallon of gasoline is$2.60. What is the percent of increase rounded to the nearest whole number?
In 1930, the average cost for a gallon of gasoline was $0.25. In 2007, the average cost for a gallon of gasoline is$2.60. What is the percent of increase rounded to the nearest whole number?...