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18) Suppose we take the precedent in the Boulston case seriously (btw: isn’t it interesting that Common Law can and does look back hundreds and hundreds of years for it?). What does that imply about the legal precedent and the moral one for instituting a carbon tax or using carbon permits for solving global warming? Or, consider this a general question to ask of folks who argue that property rights should not exist, and that furthermore, producers are not entitled to the output of their efforts. In other words, if “you didn’t didn’t build that” was taken to the extreme that some have suggested we do, would that also apply to the carbon and methane that my productive activities emit? Or do I only own the “bad” stuff that I produce?

The case for any market based regulatory proposal rests on recognizing that property rights exist and are legitimate. The Boulston case implies that the “pollutants” themselves are guilty (rabbits in this case) and not the landowner who set the conditions for them to succeed there. What is additionally ironic is the move in modern jurisprudence to give standing in courts to property – such as the state claiming to be able to take ownership of my car because my neighbor used it to commit a crime. Google the term “civil asset forfeiture” and you will be “entertained” learning about the wonderful places we go when we abandon “stodgy” notions of property rights doctrine.

 

19) How did Coase show that both the analysis of externalities by Pigou AND the policy conclusions drawn by Pigou were wrong? (in fact, the Coasean position has now become the “consensus” despite the popularity of the Pigovian approach to this day). By the way, that Pigou was wrong does not mean that Pigouvian taxes would not be an improvement in today’s world – that is most clearly NOT the point of this article or these questions.

Pigou focused almost exclusively on the “damages” imposed by “polluters” instead of asking what alternative social arrangements produce the most welfare – odd given that the title of his book was the Economics of Welfare. One way to think about it is that Pigou locks himself into an institutional arrangement that at best maximizes welfare given the current distribution of property.

In terms of the Pigouvian solutions – Pigou (and modern economists) just sweep under the rug a few major problems with Pigou: 

  1. It ignores that the taxes are not awarded to the person who is damaged
  2. It ignores the fact that there is no guarantee that the “polluter” is the low cost avoider of the damage à and a tax system that does this will produce unduly large costs
  3. The tax itself may not bring optimal conditions. As more people enter a community or as more businesses are started, the value of the tax must increase because the value of the Pigouvian damages must increase. When I move to a community, I increase the costs of externalities on you and I surely do not take those into account (because the tax increases, lowering wages and output further), so the existence of the tax means that “too many” people are induced to move to an area than is optimal. So in one case we have too much pollution and not enough people. And in the other we have too little pollution and too many people.

 

And these crucial issues are wholly aside from the calculation difficulties, implementation difficulties and political difficulties.

 

20) At the end of the article, Coase identifies a methodological (and hence now popular) failure in the analysis of externalities by the time of his writing. I contend that such failures persist to this day. What is that failure?

The simple explanation is that pundits, researchers and lay people have in mind some ideal world that does not and cannot exist and they use that as the make-weight upon which we evaluate current policies and outcomes. But Coase correctly (in my view) cautions against this nirvana “fallacy” and urges us to do a comparative institutional analysis about how movements from the current position toward any of the proposed ideals achieves its goals. Please pay careful attention to how he describes this. 

 

21) Coase closes the article with an observation criticizing economists for having a faulty understanding of what “factors of production” are. What is the way economists typically describe the use of a factor? How does he recommend we change the way we think about it? Why is this important?

Economists typically treat factors of production no different than you would ingredients in a cake recipe: how much flour, how much sugar, etc. But this will lead us to misunderstanding the true nature of social costs.

But what he urges is that we consider factors as property rights and if we do this then we can treat the “right” to do something that has negative effects as an input, a cost, just like any other. Why should we privilege “10 pounds of copper” as an input cost into producing a telephone cable any more than “8 pounds of NOx emissions?” Both are merely costs – using up resources to produce something of value. In both cases the world has less of something – in case one, it has less metal to use in cooking pots, in case two it has less fresh air. If I told you that instead of “emitting NOx” that the receipt called for some portion of your fresh air, would you treat it any differently?

And not only would this make it far easier to get the economics right, since all valuable resources acquire money prices to capture their scarcity value (such as a good view), but it would also put an end to the harmful moralizing and rhetoric about “pollution, damages and “evil” emitters.”

In every way, this is again the economists’ plea for sustainability – to everywhere and always do our best to make sure agents bear 100% of the costs they impose on others.

 

 
Here are two lesser known papers regarding the work of Coase. You would enjoy reading them:

  1. Frech, H. Edward III (1979), “The Extended Coase Theorem and Long Run Equilibrium: The Non-Equivalence of Liability Rules and Property Rights”, 27 Economic Inquiry, 254-268.
  2. Demsetz, Harold (2011), “The Problem of Social Cost: What Problem? A Critique of the Reasoning of A.C. Pigou and R. H. Coase,” Review of Law and Economics 7, 1, 2011. I found a publicly available version of the article here: http://www.sfu.ca/~allen/DemsetzSocialCost.pdf

 

 

One Response to “The Problem of Social Cost, Part IV”

  1. jb says:

    Good to see Ted Frech’s name in your bibliogrpahy (my stats/econometrics teacher in grad school). He is a very skilled instructor and was a great advisor to me.

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