Reference no: EM133077971

Externalities 

In many parts of the world where sugar cane is an important commercial crop, the fields are set ablaze to burn the leaves. Sugarcane is burned before harvesting to remove the unproductive leafy material that makes up 20 to 25 percent of the cane plant. If the leaves are not removed before processing at the factory, they reduce the amount of recoverable sucrose contained in the cane stalks. There is no economical means of removing the cane leaves other than burning. At the same time, there is no cost-effective technology currently available to remove and produce energy from cane leaves. 

In Trelawney, sugar cane farming is a major commercial activity. The burning of sugar cane pollutes the air and blackens the beaches. Pretend that the businesses that depend on tourists want the government to ban the practice.

1. Identify the externality in this situation.
2. Suppose it were possible for cane farmers and resort owners to bargain without incurring transaction costs, explain how Coase's Theorem would apply to achieve the optimal level of burning (hectares of fields burned/crop year). Be specific as to which of the two parties is granted the property rights: Cane farmers own the rights to burn canes, or resort owners have the right to unpolluted air and beaches.
3. Does the optimal solution depend on which party owns the property right?