(Solved Homework): 1.              Consider a patient (let’s call her A) with end stage renal disease, who has been on the…

1.              Consider a patient (let’s call her A) with end stage renal disease, who has been on the waiting list for a kidney for several years. She has no family members with kidneys that are immunological matches, so she is waiting for a kidney from an organ donor. Getting a new kidney would considerably improve A’s life, so she is willing to pay a considerable sum – $x – to get a replacement kidney.

Consider another patient (let’s call him B), who has just died in a motorcycle accident and who has a kidney that is an immunological match for A. When B was alive, he was an altruistic sort of person – in case of his death, he had wanted his organs to go to someone like A (though A and B never knew each other). He expressed his wishes by putting an official sticker, which cost him $0, on his driver’s license saying he was an organ donor. He was so altruistic, though, that he would have been willing to pay y for this sticker, where (y < x).

Consider finally, B’s family who (all else equal) would rather bury B with all his organs intact than without them. As a group, they derive $z of utility from burying B with all of his organs intact, even after taking into account B’s preferences (where y < z < x). Assume that the law is ambiguous but that in practice, B’s family gets to decide what happens to B’s body.

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These are the only interested parties in this story.

(a)         Describe the socially optimal outcome. That is, what ought to happen with the kidney? Is this a feasible outcome given the laws that regulate organ donation in the US?

(b)         Suppose the laws were changed so that B’s family no longer decides what happens to B’s body. Instead, all organs are harvested from de- ceased people by default. (This is analogous to assigning the property right to B’s organs to A and is reflective of current organ donation laws in Spain.) Would the socially optimal outcome happen? Explain your answer (briefly).

(c)         Suppose instead that the law is changed so that again B’s family has the right to determine what happens to his body, but B’s family can negotiate with A (including, perhaps a monetary settlement) about B’s organs. Would the socially optimal outcome happen? Explain your answer (briefly).

(d)         Who has the property right to B’s organs under current law? (You may expand beyond AB, and B’s family in your answer, if necessary).

(e)         Based on your answers to the previous exercises, does the Coase Theo- rem apply in this setting?

Expert Answer


Socially optimal outome is the point where all units are transacted which benefits the society compared to the cost to society and alternatively none of the units where the cost to society outweighs the benefit to society are transacted.

a.)The socially optimal outcome is to donate the kidney to patient A .But it is not feasible as per the law because buying or selling an organ is illegal as per the National organ tranplant act.(Public Law 98-507)

b).Socially optimal outcome in this scenario will be less than the deadweight loss i.e., since all organs areremoved from the dead there are many units which add to marginal social costs.

c)No, the sceanrio presented is not a socially optimal outcome as the patient A is a terminal patient and monetary settlements will not be any use to this patient. But if the negotiations by B’s family will include the kidney for a higher price from A, then it would be considered socially optimal outcome.

d) The kidney actually belongs to the organisation that B has pledged for.

e) Coase proposed his theorem while considering radio frequency regulations but it can be understood as follows: Since the transaction costs are never zero, it cannot be assumed that any institutional arrangement will necessarily be efficient. The further argument that he makes is to compare the alternatives offered by various institutional arrangements to see which would come close to the ‘zero transaction cost.’

Yes the theorem is applicable when the kidney is recieved by A free of cost or by paying x , as y>z>x

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