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Now, suppose B buys the right from the government for $50, and sells it to A for $90. The total KH welfare gain will be B's profit of $40, plus the government's gain of $50, or $90. If, instead, the government sold the good originally to A for $90, then the KH welfare gain would also be $90, with the government receiving all of the gains, while A simply breaks even. Therefore, the net social gain is the same whether the good is given to A or B, when transactions costs are zero and the good is a commercial good to the parties. Note that the Coase Theorem is correct whenever the good is a commercial good to the party with the lower WTP (B), even if the good is not a commercial good to the party with the higher WTP. In this example, the good is not a commercial good to A, and yet the Coase Theorem is correct.

Proposition 5.3: It is, in general, efficient to assign a right to the party with psychological ownership, where the WTA figures are not known.

Suppose that A has psychological ownership to the right, but that B does not. In this case, the welfare change from assigning the right to A rather than to B is

This will be positive, on the average. That is, if we cannot distinguish A and B in terms of their WTAs, then the expected value is greater from assigning the right to A since, in general, WTA will exceed WTP.

For example, assume that transactions costs are zero, and that the figures in Table 5.3 apply:

Table 5.3
0 0

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