Marco's IB Economics Blog: The Coase Theorem Is The Low Point Of Economic Study
In the above post, Marco bashes the Coase Theorem as a means of externality reduction pretty badly. While some of his ideas are founded, I've decided to respond with my own...
Interesting argument, Marco. I like the idea of Dick buying more and more dogs to extort money from Jane! Classic! I believe the point of the Coase theorem is to show that if property rights are clearly defined, and the number of parties involved in an externality is limited, direct negotiation can result in a socially optimal result. All it's saying is that government may not be required in all cases! Of course the example of dick and jane is silly, but in some cases such a theory could be more applicable.
One example I think is better involves you and your next door neighbor. Let's say "Dick", your neighbor, has a large sycamore tree in his yard that provides your yard with shade on hot summer days. Dick believes, however, that in a lightening storm the tree could fall on his house, so he goes out in the yard with a chainsaw to cut it down. You, seeing Dick with his chainsaw, approach him and explain that you would prefer he leave the tree standing. Of course, unless you offer Dick some renumeration in exchange for leaving the tree standing, he has no incentive to do so and will cut it down. The externality here is the lack of shade and the increased air conditioning bills you'll have to pay when the tree is gone... but with clearly defined property rights, perhaps you and Dick could come to an agreement. Maybe you agree that if the tree should ever fall on Dick's house, you'd help pay for the remodelling.
See how clear property rights and negotiations can result in the elimination of a negative externality? You never had to SUE the Dick next door and he were able to convince him to leave the tree standing in exchange for your assurance that his roof would be fixed if it fell. Hualla, the Coase Theorem, sans dog.
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In the above post, Marco bashes the Coase Theorem as a means of externality reduction pretty badly. While some of his ideas are founded, I've decided to respond with my own...
Interesting argument, Marco. I like the idea of Dick buying more and more dogs to extort money from Jane! Classic! I believe the point of the Coase theorem is to show that if property rights are clearly defined, and the number of parties involved in an externality is limited, direct negotiation can result in a socially optimal result. All it's saying is that government may not be required in all cases! Of course the example of dick and jane is silly, but in some cases such a theory could be more applicable.
One example I think is better involves you and your next door neighbor. Let's say "Dick", your neighbor, has a large sycamore tree in his yard that provides your yard with shade on hot summer days. Dick believes, however, that in a lightening storm the tree could fall on his house, so he goes out in the yard with a chainsaw to cut it down. You, seeing Dick with his chainsaw, approach him and explain that you would prefer he leave the tree standing. Of course, unless you offer Dick some renumeration in exchange for leaving the tree standing, he has no incentive to do so and will cut it down. The externality here is the lack of shade and the increased air conditioning bills you'll have to pay when the tree is gone... but with clearly defined property rights, perhaps you and Dick could come to an agreement. Maybe you agree that if the tree should ever fall on Dick's house, you'd help pay for the remodelling.
See how clear property rights and negotiations can result in the elimination of a negative externality? You never had to SUE the Dick next door and he were able to convince him to leave the tree standing in exchange for your assurance that his roof would be fixed if it fell. Hualla, the Coase Theorem, sans dog.
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