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Somewhere in Pennsylvania, a natural gas company is extracting natural gas from a well using hydraulic...

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Economics

Somewhere in Pennsylvania, a natural gas company is extracting natural gas from a well using hydraulic fracturing. This technology requires the use of large amounts of water, which they pump out of a nearby river. Downstream from the natural gas well, a farmer also uses water from the river to irrigate his crops. Since the natural gas company has started pumping water out of the river, there isn’t enough flow left in the river to fully irrigate the farmer’s crops. As a result, the farmer is losing large portions of his crops. Assume that initially, neither the farmer nor the natural gas company has property rights to the river’s water. Explain how the Coase Theorem could be applied to this problem, and how the two parties might be able to reach an efficient solution. Does it matter which of the two parties has property rights to the water? Explain

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