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6) Why does Coase argue that “making the polluter” pay is the not automatically the correct way solve the “Problem of Social Costs?”  Provide a simple illustration of the argument from one of the four case studies he presents (which means illustrate the scope for bargaining and the error/correctness in the courts’ reasoning in the case you choose).

Because it is not obvious that “the person” doing the explicit polluting is the party that can reduce the conflict for the lowest cost (YUCK! THAT TERMINOLOGY IS POOR … IF YOU RECOGNIZE THE ANSWER TO ONE, YOU WOULD RECOGNIZE THAT IT IS NOT ALWAYS PROFITABLE TO CALL A POLLUTER A POLLUTER … FOR EXAMPLE, SOMEONE WHO COMPLAINS ABOUT MY GUITAR PLAYING INSIDE OF THE CONCERT HALL ISN’T SO MUCH BEING POLLUTED AS THEY ARE POLLUTING ME!). See the bottom of page 27 and top of page 28 for more detailed discussions of this idea.

Many examples exist. He actually uses four real world (now famous) cases for his point.  These include:

  • The case of the confectioner in Sturges
  • The case of bleaching liquids in Cooke
  • The case of the smoking chimneys in Bryant
  • The case of brewing venting in Bass

In any case the entire point is to maximize the value of the production of all stuff, not just to “prevent” pollution.

7) What does question #6 above have to do with “sustainability?”

If the goal is to leave as many resources for the world as possible, then finding solutions to externality problems at the lowest cost is the only way to be sustainable. Not taking advantage of this Coasean insight means we are getting the same outcomes we could otherwise get while burning more gas, using more land, eating more food, working more hours, etc. than we otherwise would have to do.

 

8) Consider the famous Sturges confectioner case. From this case, and from understanding Coase’s argument in general, would you argue that when entrepreneurs come up with value enhancing ideas (such as the new consulting services offered by the doctor) that it necessarily destroys the traditional “ways of life” such as by that of the confectioner? Would you argue that entrepreneurs therefore destroy the well-being of traditional occupations like confectioners? Can you argue, instead, that the doctor rather than being a destroyer, is actually promoting social progress?

No and No. Think about why. Ignore the fact that the value generated by both the confectioner and the doctor have NOTHING at all to do with the values OF the confectioner and the doctor. Instead recognize that value is a function of what others desire. If the doctor comes up with a new idea that is not as valued as what the confectioner was doing, nothing would change. Furthermore, if the confectioner ipso facto valued being a confectioner independent of the customers he or she serves, then it must be the case that she or he would be willing to “pay” to keep the doctor from intruding.

But beyond this, the point of the new entrepreneurial idea (and the court decisions surrounding it) is that the existence of the new idea makes the pie bigger! And therefore with appropriate contracting both the confectioner and the doctor are made better off when the doctor comes up with a new idea.

 

9) Consider again the famous Sturges confectioner case (particularly Coase’s observations at the end of it when he talks about metal forges conflicting with residential land use values).

Now consider the following flyer sent to be a few years ago from my local state assemblyperson:

Buy Local

You can’t really read it, but the flip side of the flyer said, “Keep Your $ Where Your HEART Is! Support Our Local Farms!” So, thousands of taxpayer dollars were used to advertise on behalf of a small subset of residents in our community. And at almost every town meeting I attend issues of zoning and “appropriate” land use come up. The most recent one may actually shock you, for example. When I asked the folks (I won’t tell you who they were) to have a more open discussion about zoning, apartment building and school choice in my community, this is the response I received:

“Mike, I am inclined to agree with your suspicion.  We are having a hard time getting some of our home-owning residents comfortable with the idea of higher-end rental properties in TOWN that appeal to wealthier empty-nester types who don’t want to carry a mortgage and maintain a home.  Of course, they don’t want to live in older and tired rental properties either, instead, preferring to spend their money on something new.  So developers are coming to us with proposals for new high-end rentals.  But a segment of our home-owning population has this fear that a project such as this will attract those of lower economic means who partly inspired  creation of the suburbs in the first place, even though the monthly rents will range from $800 to $1800.”

So, in the case of Sturges and the other illustrations therein, the courts argued that they ought to have a say in what the “character of a community” looks like – or that they had to act in accordance with what people in a community wanted for its character. In the case of my town, this is not the courts talking but rather the elected state congressional representatives and the local political officials and residents saying that they need to use the force of coercion to share the character of “our” community.

What do all of these have in common and what do the implications of the Coase paper suggest about the veracity of these sentiments (actually they are not sentiments, they are actual policies …I need a new language)?

Simply put, if the land as farms or as residential homes is in its highest value use as farms and residential homes and not as factories, forges, confectioners, low-rent apartments, etc. then it would seem to suggest that a freely functioning “market” would ensure that the land ended up in those uses.

 

The fact that we need coercion to put land into those “valuable” uses tells us EITHER:

i)                    That the transactions costs of obtaining those solutions are prohibitively high (this seems laughable in some circumstances – as if the purchasing of a farm is some sort of difficult transaction that has no legal precedent, or that buying valued food from local farms is so difficult) so that regulatory approaches are required to reach an efficient outcome; or

ii)                  Special interests are taking advantage of the many to the benefit of the few; or

iii)                The claims (this is a version of ii) are simply not true or that there are other external costs that are not being taken into account even if Coasean bargaining were easy (this is a version of i).

 

10)     In reflecting on Coase’s article and some of the case studies and illustrations he puts forth I’d like you to briefly defend each of the two following opposing positions.

  1. As more and more people around the world move into densely populated cities, the (net) problem of social costs will only become more severe. As a result, it is less likely that Coasean bargains will be an effective way to deal with many problems, and therefore the role of government is destined to expand. Therefore, in addition to our wealth today allowing us to “buy” more government, perhaps the reason why our government is so large today is because of this Coasean difficulty, and not because of some inherent march toward bigger government. 
  2. As more and more people around the world move into densely populated cities, the (net) problem of social costs will only become less severe. As a result, it is more likely that Coasean bargains will be an effective way to deal with many problems, and therefore the role of government is destined to shrink. Our bigger government today has therefore come in spite of these favorable trends toward making it smaller.

 Note that when I say “argue” there are at least 4 major claims implicit in the sentences above. You must identify what they are and say something about them vis-à-vis the challenge in each part.

 This can be the topic of a large book, so I will not offer my thoughts. For credit students should respond to several of the claims (implicit) in the question and from reading the paper:

  • Does living in a city lead to more or less conflict?
  • Does living in a city, presumably with better communications and transportation infrastructure, make Coasean negotiations more or less difficult (and hence, combinining this with your answer to the first question it remains an empirical question about whether more conflict, on net, would exist).
  • Does living in a city create more value for us to exchange over?
  • If traditional Coasean bargains are more difficult or less likely, does it follow that government institutions have to be the institutions to “solve” the problems of social cost? You know my view – and there is much evidence for it. For example, residential housing developments have, by contract, prohibited and required certain actions as a way to minimize the problems of social costs and they have done so independent of any government force.

There are many other aspects I do not cover here nor do I expect students to cover. For those interested, start with the classic book by Jane Jacobs, The Death and Life and Great American Cities, which was written at the same time as this Coase paper and follow the literature on urbanization, technology and property rights that has emerged since. 

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