4. Consider a scenario where British Petroleum (BP) is drilling for oil in the gulf coast: a. Does an externality exist in this case? If so, classify the externality as positive/negative (or both) and explain how it might arise/not arise. b. If an externality exists, determine whether the Coast theorem applies (i.e., is it possible/ reasonably feasible to assign property rights and solve the problem?) c. Suppose the oil spill only damages the nearby oceanfront properties (i.e., there are only two parties - BP and the property owners). Explain with graph how the allocation of property right (according to Coase), can result in a socially optimal allocation.
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This leads to a tragedy of the commons situation, where both parties have an incentive to exploit the resources as much as possible. As a result, the oceanfront properties are overused and damaged by the oil spill. Show more…
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