Elasticities and Residual Demand Curve A. Elasticity definitions inelastic, elastic B. Individual firms in a perfectly competitive model face infinitely elastic demand curve. Economies of scale requiring large capital costs 3.
Solution internalize the externality by imposing a tax.
Coase's Theorem - define property rights and allow bargaining. See Coase's article. A. Critical question is what the value is of what is obtained and value of what is sacrificed to obtain it. B. Doesn't agree with method of paying for all damage caused. C. Example of cattle and farmer's crops - if jointly owned, herd would get as large as to the point where the value of one more cattle equals cost of lost crops.