Sunday, January 16, 2011

The Problem of Social Cost

There are lots of interpretations of Coase out there - including, but not limited to, Kahn (your textbook author) chapter 3, Haab, and Friedman.

I figure, let's read it ourselves - The Problem of Social Cost.

What do you think he was trying to say?

61 comments:

Graham Sheridan said...

We tend to divide this discussion into two groups: polluters and people who are affected. However, I think most people are both. I may be hurt by air pollution, but I also use lights, drive, and demand products that generate air pollution to make. So, although people who drive more than I do may pollute my air, it is not as though I never do it myself.

Many of these problems can be looked at in this two-group way (a factory dumps a bunch of dye into a stream, people downstream are mad). But many cannot be. This adds another level of complexity to the situation.

Guilherme fernandes said...
This comment has been removed by the author.
Guilherme fernandes said...

This is brilliant. I found it particularly interesting how he addresses property rights and the role of costs in general.
I agree with him when it comes to not advocating a single, best way to deal with negative externalities caused by an economic agent. Measuring social and private costs and benefits in order to determine the net benefit for each involved agent, taking into consideration particular characteristics of the situation, is likely to be the most rational choice. However, economists still lack a cohesive model to perform such a task appropriately.
It seems to be that he has great faith in bargain, and that it would be a tool to providing good relationships between agents. However, in a country like Brazil, for example, so many people are uneducated (especially the rural population) that, if there were some sort of negotiation between a rich, powerful farmer (who happens to be also a politician, what is quite common) and peasants, I really doubt there would be a socially fair agreement. The article has helped to shed light on the matter, though, because I'll always remember to scrutinize the situation before picking a side.
As it usually happens in Economics, in my opinion, what he was trying to say was "it depends".

Siwan said...

I found Coase’s suggestions on how to deal with externalities very refreshing.
Coase advocates the notions that legal rules are only justified by reference to a cost benefit analysis, and that nuisances are often more symmetric/reciprocal conflicts between the interests of two parties than the “fault” of one party. The detection and treatment of transaction costs is crucial here. The question then becomes: is it desirable to make one party liable (by law) in conditions in which it is too expensive for bargains between two parties to be made?/Can the market generate the optimal level of the externality? (Coase believes that the market can always generate such a level, as long as transaction costs are insignificant)
If there were no transaction costs, legal rules would be irrelevant to production maximization - the market would take care of that. However, there are hardly any cases where no costs are associated with bargaining and gathering of information. In that case, legal rules are justified to the extent of their ability to allocate rights to the “most efficient right-bearer”. This would be an attempt to offset the outcome that many welfare-maximizing reallocations don’t happen because of the transaction costs involved. Courts should be guided by the most efficient (in the economic sense) solution and produce similar outcomes to what would result if transaction costs were eliminated.
Coase challenges traditional ideas about the rule of liability and shows how questions of justice and morality (i.e. punishment and responsibility for negative outcomes) can stand in the way of beneficial economic analysis, as sometimes a purely economic approach would not advocate for making certain parties liable for negative externalities that result from their actions. By focusing on the importance of transaction costs, Coase also emphasizes the fact that law and regulations are not as important or effective at helping society as many believe. Part of the “change of approach” he advocates is to analyze positive effects of government intervention by looking at transaction costs.

Ben Bartlett said...
This comment has been removed by the author.
Ben Bartlett said...

In this article, Coase lays out a fairly interesting framework with which to address the problem of negative externalities. Though he begins with a somewhat basic social vs. private costs and benefits analysis, his argument begins to flow quite well when he raises the question of whether “the gain from preventing the harm is greater than the loss which would be suffered” by stopping a given action. This question brings the idea of value into the equation. This is to say, in order for one to answer this question, one must be able to actually quantify the costs and benefits of an action. This is not an easy task because in the real world the affects of a given action are much more far reaching than those discussed in Coase’s simplified examples. Likewise, understanding and accurately accounting for the impact an action has on its environment is only half of the battle. These impacts must be assigned value in order to determine whether the benefits of the action outweigh its costs. This necessitates a high level of subjectivity and would most likely allow personal interest and corruption to play a part in the decision-making as well. While Coase attempts to provide a way to think about and address issues surrounding negative externalities, he actually does a great job of illustrating how complex and dynamic the issue is and how there really is not an end all, be all solution to the problem.

sturgesa12 said...

This article, by Mr. Coase, deviates from the stance that economist generally take on measure private and social cost and believes that these courses of action should not be applied to every situation. The general prescription is a fine, tax, or relocation of the offending party. However, Coase makes the point that there is a reciprocal nature to these interactions and correcting or restraining one party’s actions due to another’s harm on another party causes the harm to be switched to the other party. The approach to welfare economics is flawed because it focuses on removing the deficiency but not on changes to the system from the corrective measures. These secondary effects could be more damaging than the initial problem. Since every situation is unique, there needs to be a fresh look at what needs to be done.

I enjoyed this reading because it presented a view that I had never considered. Also, it informed me that there are several ways to look at welfare economics. There is more to these problems than just a fine, tax, or restriction, which I had not thought about.

Ryan Hanson said...

Coase's argument relies on an assumption that two parties have differing interests and are amidst a situation where a both the "generator" and the "victim," fail to meet socially optimal levels on each side. For example, a firm that emits sulfur dioxide while producing does not bear the full cost of his or her actions, leaving the "victim" with unclean air. At the same time, the "victim" can be a hinderance to the "generator" by locating him or herself in a place near the firm. One side (the polluter) wants to use the air, but fails to bear the full cost. The other side (the citizen) wants clean air, but chooses to live near the firm.

Thus, Coase suggests mutual cooperation to meet socially optimal levels of pollution. Coase dismisses the idea of Pigouvian taxes as "unproductive" and overlooks the idea of transaction costs. The idea of cooperation also becomes more difficult as more people become involved (i.e. China's pollution ending up in California). Another issue that comes up is that there are differing prices for the buyer and seller and thus, the market cannot function properly. Finally, as property rights are not always clearly defined, it may be hard to measure income effects, according to Kahn. While Coase argues that government intervention is unnecessary and all one needs is cooperation, this argument seems impracticable.

Ann McCampbell said...

The article follows the Coase theorem in that it suggests a market will work toward the optimal level of externalities. It indicates there are two groups with differing agendas that will work out some agreement that is best economically taking into account benefit from the pollutant as well as the externality. Kahn indicates it can often be difficult to determine the extend of property rights. Although Coase argues that the definition of property rights does not make a difference. However, there is a case that government intervention may be necessary to negotiate transaction costs and property rights. There is not always a clear designation between polluters and pollutants.

Ann McCampbell said...

The article follows the Coase theorem in that it suggests a market will work toward the optimal level of externalities. It indicates there are two groups with differing agendas that will work out some agreement that is best economically taking into account benefit from the pollutant as well as the externality. Kahn indicates it can often be difficult to determine the extend of property rights. Although Coase argues that the definition of property rights does not make a difference. However, there is a case that government intervention may be necessary to negotiate transaction costs and property rights. There is not always a clear designation between polluters and pollutants.

Shane R said...

Coase's argument does not convince me that government intervention is not the answer. His examples of compromise within the market seem over simplified. But it does point out many of the obstacles and possible failures of governmental regulations. Chapter 3 does an excellent job explaining the different methods and applications of government regulations. The hardest part still seems to be quantifying negative externalities when making policy decisions.

Jeff Stirling said...

As we see in this immensely descriptive article from Ronald H. Coase, there are other ways to deal with disparities between private and social costs, without government intervention. It is quite delightful to read from another view point on the specific topic, as Kahn prefers the Piguo approach to solve the problem. Things are not as clear cut as Piguo made it out to be. By having government intervention, there are other secondary effects that may not be taken into account. Coase notes different examples of generators and victims to help the readers fully understand his theorem. He believes that without government intervention, the two different parties have the desire to coerce and come to an agreement. This will automatically move the private costs and social costs closer together. Everyone wants to have their costs as little as possible, and benefits as large as possible. They will come to an agreement where they both have their benefits outweighing their costs. Solving for negative externalities proves difficult, especially in situations where pollution can affect different parts of the country or world (e.g. acid rain).

john said...

In “The Problem of Social Cost”, Coase provides an interesting argument concerning the issue of negative externalities in the market. Initially, he uses a rather simple example of the cost/benefit relationship between a cattle-raiser and neighboring farmer. As the cattle-raiser increases the size of the herd, more and more damage is done to the crops of the farmer. Coase feels that the cattle-raiser would not buy more cows if the social cost exceeded the benefit of one more cow. He thinks the two neighbors will negotiate with each other to create a mutually beneficial relationship. In other words, Coase believes that the market will automatically create the desired or agreed-upon level of an externality if there is no intervention.

This may work in a simple relationship, but most negative externalities are difficult to measure and affect multiple parties. His initial argument assumes that most businesses possess the ethical fiber to act with the highest level of social benefit in mind. Realistically, there are a lot of businesses out there who will continue to impose extremely negative externalities on the public unless there is some sort of intervention. Although negotiations between affected parties can help, it is usually in the best interest of the company imposing the largest negative externality to continue doing so. This may be selfish, but companies often make decisions that will cut expenses and generate the highest level of profit. Ultimately, Coase admits that there is not a clear cut solution to the problem of negative externalities because benefits and costs are difficult to value and social relationships are so complex.

Spence Daw said...

In “The Problem of Social Cost”, Coase provides an interesting argument concerning the issue of negative externalities in the market. Initially, he uses a rather simple example of the cost/benefit relationship between a cattle-raiser and neighboring farmer. As the cattle-raiser increases the size of the herd, more and more damage is done to the crops of the farmer. Coase feels that the cattle-raiser would not buy more cows if the social cost exceeded the benefit of one more cow. He thinks the two neighbors will negotiate with each other to create a mutually beneficial relationship. In other words, Coase believes that the market will automatically create the desired or agreed-upon level of an externality if there is no intervention.

This may work in a simple relationship, but most negative externalities are difficult to measure and affect multiple parties. His initial argument assumes that most businesses possess the ethical fiber to act with the highest level of social benefit in mind. Realistically, there are a lot of businesses out there who will continue to impose extremely negative externalities on the public unless there is some sort of intervention. Although negotiations between affected parties can help, it is usually in the best interest of the company imposing the largest negative externality to continue doing so. This may be selfish, but companies often make decisions that will cut expenses and generate the highest level of profit. Ultimately, Coase admits that there is not a clear cut solution to the problem of negative externalities because benefits and costs are difficult to value and social relationships are so complex.

Spence Daw said...

In “The Problem of Social Cost”, Coase provides an interesting argument concerning the issue of negative externalities in the market. Initially, he uses a rather simple example of the cost/benefit relationship between a cattle-raiser and neighboring farmer. As the cattle-raiser increases the size of the herd, more and more damage is done to the crops of the farmer. Coase feels that the cattle-raiser would not buy more cows if the social cost exceeded the benefit of one more cow. He thinks the two neighbors will negotiate with each other to create a mutually beneficial relationship. In other words, Coase believes that the market will automatically create the desired or agreed-upon level of an externality if there is no intervention.

This may work in a simple relationship, but most negative externalities are difficult to measure and affect multiple parties. His initial argument assumes that most businesses possess the ethical fiber to act with the highest level of social benefit in mind. Realistically, there are a lot of businesses out there who will continue to impose extremely negative externalities on the public unless there is some sort of intervention. Although negotiations between affected parties can help, it is usually in the best interest of the company imposing the largest negative externality to continue doing so. This may be selfish, but companies often make decisions that will cut expenses and generate the highest level of profit. Ultimately, Coase admits that there is not a clear cut solution to the problem of negative externalities because benefits and costs are difficult to value and social relationships are so complex.

David Dennis said...

Ronald Coase shows how there are many factors to consider when dealing with externalities between two parties, such as “victims” and “polluters”. The issues of who has the legal rights to property and who actually has the lowest cost to avoid the problems are the main concerns. These are two sides to how the external costs can be viewed and it is typically difficult to make comparisons of costs without similar scales. The groups involved can make contracts to promote their interest if there are no transaction costs. Since this is not realistic, the main goal is to lower transaction costs in order to reduce the total inefficiencies. Therefore, Coase shows that there is no solution that is completely efficient and that the focus should be on finding the lowest cost for all involved.

Siwan said...

I found Coase’s suggestions on how to deal with externalities very refreshing.
Coase advocates the notions that legal rules are only justified by reference to a cost benefit analysis, and that nuisances are often more symmetric/reciprocal conflicts between the interests of two parties than the “fault” of one party. The detection and treatment of transaction costs is crucial here. The question then becomes: is it desirable to make one party liable (by law) in conditions in which it is too expensive for bargains between two parties to be made?/Can the market generate the optimal level of the externality? (Coase believes that the market can always generate such a level, as long as transaction costs are insignificant)
If there were no transaction costs, legal rules would be irrelevant to production maximization - the market would take care of that. However, there are hardly any cases where no costs are associated with bargaining and gathering of information. In that case, legal rules are justified to the extent of their ability to allocate rights to the “most efficient right-bearer”. This would be an attempt to offset the outcome that many welfare-maximizing reallocations don’t happen because of the transaction costs involved. Courts should be guided by the most efficient (in the economic sense) solution and produce similar outcomes to what would result if transaction costs were eliminated.
Coase challenges traditional ideas about the rule of liability and shows how questions of justice and morality (i.e. punishment and responsibility for negative outcomes) can stand in the way of beneficial economic analysis, as sometimes a purely economic approach would not advocate for making certain parties liable for negative externalities that result from their actions. By focusing on the importance of transaction costs, Coase also emphasizes the fact that law and regulations are not as important or effective at helping society as many believe. Part of the “change of approach” he advocates is to analyze positive effects of government intervention by looking at transaction costs.

gioioson12 said...

Coase’s treatment of the problem of negative externalities leads to the discussion of the dual and reciprocal effects of socially costly actions on the utility and the production of either side, and the consideration of the amount of socially costly activities that one should have to put up with for the “general good.”

Coase argues that the most important requirement for this mutual nature of negative externalities becomes the ability to properly delineate property rights, and being able to adequately assign costs to one side of the dispute or the other. He postulates that government intervention can be appropriate and cost-effective in some cases, but maintains that the Pigouvian position on externalities is inefficient when the delineation of property rights is clearly defined and when they take into consideration the economic effect that the law might portend. This I found to be the most interesting thought - that courts with an economic consciousness could be the real game-changer for deciding disputes arising from the effects of negative externalities. However, I question the applicability of this thought, especially in a world where political forces and lobbyists have strong interests and influence in the form that these laws might take.

In the end, the most important consideration for Coase is the ultimate cost that a new system of laws will incur. If the costs are greater than the benefits, Coase advises that sometimes putting up with a situation, although it may be bad, can be one’s best option.

Paige Gance said...

Coase deals with externalities in a way that many never consider. The creator of the externalities is usually seen as the "bad guy" and this view is encouraged by the use of the term "victim." But Coase realizes that when you tax or fine someone like a polluter, there is a quantifiable cost incurred by the decrease in quantity of goods produced by that factory. In his explanation of market solutions, Coase has the victim compensating the factory owner (or in his example, cattle rancher) for the loss in revenue that they experience when reducing their externality. Through such an arrangement, both parties reach an optimal level of production. But this runs into a few complications. Coase begins to delve into these complications, such as transaction costs and number of affected victims and firms, but fails to expand them to the global levels that need to be dealt with in the real world. In some small-scale situations and special cases, it may be true that government intervention is inappropriate and unnecessary, but large-scale externalities require a more organized government approach. But of course, the government has its share of inefficiencies too.

Van Nguyen said...

The case arguing against governmental intervention that Coase made in this paper only applies to the one-to-one game scenario since both parties can easily negotiate the outcome. Coase bases his analysis on a two-player game theory scenario in which all the rules and outcomes are known to the players; thus, he can derive the so-called optimal outcome regardless of property rights. If there is a few limited number of externality generators and externality receptors, then the assumption of zero transaction costs might still be valid. Yet, the higher the number of players, the harder it is for them to have the transparency to reasonably predict the outcomes and the higher the transaction cost.

I think Coase is not unaware of the limitation of his strong assumption of zero transaction. He emphasizes the importance of a firm as an agent to reduce the number of negotiations and transactions that one has to make in order to use resources from multiple rights owners (i.e. reducing the transaction cost). The government is in fact, Coase's "super-firm" since it has the utmost power to completely reduce the number of negotiations. Nonetheless, his whole argument on the unnecessary interventionist role of government is based on his observation that administrative cost of the government can be extremely high. This line of argument seems very circulating to me; hence, I'm not convinced in his leap of faith to apply the two-player scenario to generalize on externality-optimizing behavior of the market.

Becca Bolton said...
This comment has been removed by the author.
Cailin said...

Coase uses this article to illustrate his belief that government interventions are unnecessary and markets will generate the optimal level of the externality through bargaining between the two players. In his opinion legal rules are only justified with respect to cost benefit analysis, and negative externalities thought to be produced by one party and harmful to the other are actually symmetric conflicts between the interests of the two. Assuming a world without transaction costs, people, according to Coase, would bargain with each other to produce the most efficient distribution of resources. However we know that in the real world people cannot negotiate costlessly and as the two parties become larger, like two countries, or there exist great disparities between the two, the transaction costs become significant and in need of attention.
I greatly enjoyed Coase’s argument however I believe that most of his examples were oversimplified and I doubt that many of the externalities that we discuss in class will be able to hold the same assumptions.

ChampionJ said...

Coase provides an extremely thorough set of analyses to explain his interpretation of the market system. In essence, Coase believes that the market in question will tend to shift towards the best case scenario in terms of externalities.

He begins by citing an theoretical example of a cattle farmer and his or her liability when it comes to actions of his herd. This example is simple enough and can be understood through basic arithmetic. The question gets more complicated, however, once he ventures into the subject of government intervention. Coase then cites an example in which government intervention complicates matters and fails to bring about the optimal level of externalities.

I would tend to agree with Coase for the most part, especially with the point I believe he starts to make on page nine: "The government is able, if it wishes, to avoid the market altogether, which a firm can never do." In my opinion, the government should not be able to make important decisions in a market where it is not subject to the negative impacts that it's decision may produce. This is basically foreshadowing his ultimate decision on the matter of government intervention and the negative impacts that it may bring about.

In the end, Coase brings one realization to the table: the decision-making process of a particular market is an extremely complicated, dynamic process influenced by many decisions over time. There is no single, clear cut solution for many situations.

ChampionJ said...
This comment has been removed by the author.
ChampionJ said...

Coase provides very thorough analyses of multiple cases throughout the discussion. The first example using the cattle allows for the reader to see a seemingly simple of interaction between a two farmers, one of which is causing a negative externality for the other. Basic arithmetic is used to help understand this process.

The scenarios become more complicated as Coase continues, especially once he starts discussing government interaction. One of Coase's comments particularly interested me: "The government is able, if it wishes, to avoid the market altogether, which a firm can never do." In my opinion, no group should be able to make an important decision without being subjected to the negative impacts that it be cause.

As he continues, I believe Coase continues to show his disapproval of government interaction. Throughout this essay, one thing that struck me was his incredibly deep discussion on every subject. That basically displays how the decision making process is extremely complicated and certainly dynamic when dealing with externalities. There is no single, clear cut solution to any of the scenarios that he writes about.

ChampionJ said...

Coase provides very thorough analyses of multiple cases throughout the discussion. The first example using the cattle allows for the reader to see a seemingly simple of interaction between a two farmers, one of which is causing a negative externality for the other. Basic arithmetic is used to help understand this process.

The scenarios become more complicated as Coase continues, especially once he starts discussing government interaction. One of Coase's comments particularly interested me: "The government is able, if it wishes, to avoid the market altogether, which a firm can never do." In my opinion, no group should be able to make an important decision without being subjected to the negative impacts that it be cause.

As he continues, I believe Coase continues to show his disapproval of government interaction. Throughout this essay, one thing that struck me was his incredibly deep discussion on every subject. That basically displays how the decision making process is extremely complicated and certainly dynamic when dealing with externalities. There is no single, clear cut solution to any of the scenarios that he writes about.

ChampionJ said...

Coase provides very thorough analyses of multiple cases throughout the discussion. The first example using the cattle allows for the reader to see a seemingly simple of interaction between a two farmers, one of which is causing a negative externality for the other. Basic arithmetic is used to help understand this process.

The scenarios become more complicated as Coase continues, especially once he starts discussing government interaction. One of Coase's comments particularly interested me: "The government is able, if it wishes, to avoid the market altogether, which a firm can never do." In my opinion, no group should be able to make an important decision without being subjected to the negative impacts that it be cause.

As he continues, I believe Coase continues to show his disapproval of government interaction. Throughout this essay, one thing that struck me was his incredibly deep discussion on every subject. That basically displays how the decision making process is extremely complicated and certainly dynamic when dealing with externalities. There is no single, clear cut solution to any of the scenarios that he writes about.

ChampionJ said...

Coase provides very thorough analyses of multiple cases throughout the discussion. The first example using the cattle allows for the reader to see a seemingly simple of interaction between a two farmers, one of which is causing a negative externality for the other. Basic arithmetic is used to help understand this process.

The scenarios become more complicated as Coase continues, especially once he starts discussing government interaction. One of Coase's comments particularly interested me: "The government is able, if it wishes, to avoid the market altogether, which a firm can never do." In my opinion, no group should be able to make an important decision without being subjected to the negative impacts that it be cause.

As he continues, I believe Coase continues to show his disapproval of government interaction. Throughout this essay, one thing that struck me was his incredibly deep discussion on every subject. That basically displays how the decision making process is extremely complicated and certainly dynamic when dealing with externalities. There is no single, clear cut solution to any of the scenarios that he writes about.

Mackenzie Doss said...

The Coase theorum appears to be a perfect example of one of Stavin’s myths: economists favoring “free-market” solutions to environmental problems. Widely interpreted as an example of how private negotiations between “polluters” and “victims” can lead to efficient pollution levels without government interference, I would argue that Coase is not in fact advocating a market driven process. While these negotiations certainly seem to take a laissez-faire approach to the issue of externalities (and an alternative to government intervention), I think it is possible to argue that establishing property rights for externalities is a far cry from creating a market for externalities (While property rights are necessary for market forces, they are not the only condition necessary). I also find it difficult to label his negotiations a “market” when he defines his examples to only one “polluter” and one “victim”. Arguably, a competitive market is defined by many buyers and many sellers and is not operated by price negotiation but price taking. While I have a limited background in economics, I think it is safe to say that his negotiations are not a “market process”…but what exactly are they?

Mackenzie Doss said...

The Coase theorum appears to be a perfect example of one of Stavin’s myths: economists favoring “free-market” solutions to environmental problems. Widely interpreted as an example of how private negotiations between “polluters” and “victims” can lead to efficient pollution levels without government interference, I would argue that Coase is not in fact advocating a market driven process. While these negotiations certainly seem to take a laissez-faire approach to the issue of externalities (and an alternative to government intervention), I think it is possible to argue that establishing property rights for externalities is a far cry from creating a market for externalities (While property rights are necessary for market forces, they are not the only condition necessary). I also find it difficult to label his negotiations a “market” when he defines his examples to only one “polluter” and one “victim”. Arguably, a competitive market is defined by many buyers and many sellers and is not operated by price negotiation but price taking. While I have a limited background in economics, I think it is safe to say that his negotiations are not a “market process”…but what exactly are they?

George Brooke said...

In this article Coase is arguing that government intervention is unnecessary for solving problems of firms taking action that is harmful to others. Coase begins with a simplified situation as an example that negotiation between the producer and the people harmed can help solve the problem. By accounting for the damages that are done and the costs that are incurred by preventing those damages, an agreement can be made where both parties maximize their benefits. In order to compare the costs and benefits, values have to be quantified to an amount that all parties agree on. This seems like a very unlikely situation because environmental damages are very difficult to put in numbers, and it is unlikely that both parties will easily come to an agreement on those numbers. A simple negotiation also has a risk that one of the parties might provide false information or take an unfair advantage. Government intervention on the other hand presents the risk of significant penalties and has a better chance of providing fair solutions.

Parker Pritchett said...

Coase presents the concept of offender versus victim in a an enlightening manner. He claims that by A being forced to stop an action or be punished for an action because it harms B, but which benefits itself, B will then just be harming A. For example, a factory who must stop polluting and therefore producing because of the harm to a neighborhood, is then being harmed by that neighborhood because of having to stop. When put in this light, it could be suggested that this model does not truly create an equilibrium of benefits, but rather just becomes a game of mutual harm.
Coase claims that this is the traditional method of solving many environmental problems. He also claims that until we alter the approach to these problems we will never be able to alter the solution (to a better one specifically). The only problem with Coase's argument is the fact that only applying monetary losses and gains between two parties might neglect to account for important negative externalities that affect the entire planet. It is much more simple to label opponents A. nearby neighborhood and B. factory than to use this approach when the opponents are A. The World and B. a polluter. I'm not sure how his approach would apply to the big picture.

Parker Pritchett said...

Coase presents the concept of offender versus victim in a an enlightening manner. He claims that by A being forced to stop an action or be punished for an action because it harms B, but which benefits itself, B will then just be harming A. For example, a factory who must stop polluting and therefore producing because of the harm to a neighborhood, is then being harmed by that neighborhood because of having to stop. When put in this light, it could be suggested that this model does not truly create an equilibrium of benefits, but rather just becomes a game of mutual harm.
Coase claims that this is the traditional method of solving many environmental problems. He also claims that until we alter the approach to these problems we will never be able to alter the solution (to a better one specifically). The only problem with Coase's argument is the fact that only applying monetary losses and gains between two parties might neglect to account for important negative externalities that affect the entire planet. It is much more simple to label opponents A. nearby neighborhood and B. factory than to use this approach when the opponents are A. The World and B. a polluter. I'm not sure how his approach would apply to the big picture.

Amy said...

I agree with many of the prior postings that Coase's point that externalities are reciprocal in nature is interesting. However, externalities such as air pollution do not effect just those living downwind from a factory, but may travel between nations. Problems of pollution and greenhouse gases leading to global warming are also on a greater scale than an issue between a cattle herder and a farmer. How can the world negotiate or bargain with all polluting companies. Even in Coase's ideal world without transaction costs the bargaining is on such a large scale that it is impossible to conduct.
While there may be a place for bargaining rather than government interventions in small scale situations regarding externalities, I do not see a way for externalities involving world climate changes to be solved through bargaining.

Amy said...

I agree with many of the prior postings that Coase's point that externalities are reciprocal in nature is interesting. However, externalities such as air pollution do not effect just those living downwind from a factory, but may travel between nations. Problems of pollution and greenhouse gases leading to global warming are also on a greater scale than an issue between a cattle herder and a farmer. How can the world negotiate or bargain with all polluting companies. Even in Coase's ideal world without transaction costs the bargaining is on such a large scale that it is impossible to conduct.
While there may be a place for bargaining rather than government interventions in small scale situations regarding externalities, I do not see a way for externalities involving world climate changes to be solved through bargaining.

Shane Ramee said...

I think I understand Coase much better after reading those second two articles. His ideas seem to work well to smooth out market imperfections. But it only works when there are two or few parties compromising to solve a conflict. The transaction costs and logistics get unreasonable when dealing with a problem involving many people as most environmental issues do. This is way it seems to me that the government is in the perfect position to act as a mediator to help set up the compromise and efficiently solve major environmental problems that involve lots of people. Since everyone pays the government in the form of taxes then there is know freeloader problem. The difficulty comes in designing a taxing or subsidies program that fairly distributes social cost and reduces environmental costs.

Bobby R. said...

In “The Problem of Social Costs”, Ronald Coase criticizes the principles of welfare economics—labeling them as inefficient and even “undesirable.” He suggests that Pigou’s solutions for addressing negative externalities are “extremely elusive,” because Pigou “had not thought his position through.” He suggests that a better approach to mitigating social costs is bargaining. If a cattle-raiser and farmer can come to an agreement about the optimal levels of production (crops and steers), it would be more efficient than holding the cattle-raiser liable. Though protracted and repetitive at times, the paper does an excellent job of developing his argument with a cost-benefit framework. However, I feel that Coase’s argument is not without problems. Throughout the paper, Coase contends that the most optimal level of production is the one that maximizes efficiency. As other in the class have pointed out, this argument is overly simple. His does not adequately address the distribution of costs and benefits, because he assumes that people have equal bargaining power. Due to asymmetric information, income disparities and intangible social cost, it is unlikely that bargaining will produce the most socially optimal result. I still thought Coase’s paper was insightful. I enjoyed Coase’s discussion on government. He does not suggest that government regulation is without benefits, he simply contends that these benefits are exaggerated. He underscores the need of more thorough economic analysis to determine the extent of both government and market inefficiencies.

Bobby R. said...

In “The Problem of Social Costs”, Ronald Coase criticizes the principles of welfare economics—labeling them as inefficient and even “undesirable.” He suggests that Pigou’s solutions for addressing negative externalities are “extremely elusive,” because Pigou “had not thought his position through.” He suggests that a better approach to mitigating social costs is bargaining. If a cattle-raiser and farmer can come to an agreement about the optimal levels of production (crops and steers), it would be more efficient than holding the cattle-raiser liable. Though protracted and repetitive at times, the paper does an excellent job of developing his argument with a cost-benefit framework. However, I feel that Coase’s argument is not without problems. Throughout the paper, Coase contends that the most optimal level of production is the one that maximizes efficiency. As other in the class have pointed out, this argument is overly simple. His does not adequately address the distribution of costs and benefits, because he assumes that people have equal bargaining power. Due to asymmetric information, income disparities and intangible social cost, it is unlikely that bargaining will produce the most socially optimal result. I still thought Coase’s paper was insightful. I enjoyed Coase’s discussion on government. He does not suggest that government regulation is without benefits, he simply contends that these benefits are exaggerated. He underscores the need of more thorough economic analysis to determine the extent of both government and market inefficiencies.

Katie Garratt said...

To begin, Coase points out the reciprocal nature of the problem that is often overlooked. Traditional solutions often aim to restrain A from harming B, but this ignores the effect on A, thus the nature of the problem is reciprocal. The goal should then be to “avoid the more serious harm.” This statement made me think of a production possibilities frontier and the tradeoff between producing two options.

Coase uses the example of stray cattle destroying a neighboring farmer’s crops. He begins by stating that this is a case where most economists would agree that the party causing the damage should pay for all damages. However, Coase uses a simple arithmetic example to illustrate circumstances where an agreement is met that is better off for both parties. If the cattle destroy an entire area of land, then the cattle raiser has to pay the farmer for all of the damaged crops. An agreement is reached whereby the farmer agrees not to cultivate this area of land in return for payment from the cattle raiser, and the payment is less than what the cattle raiser would have had to pay if the land was cultivated and all the crops on it were destroyed. Coase later points out that the rearrangement/ agreement only occurs when an increase in the value of production is greater than the costs of bringing about an arrangement.

Jennie said...

Coase argues against Pigou’s theory of liability based on avoiding the most serious harm. Coase views this more serious harm as a slightly higher ratio of cost to production. To him this is far worse than the disregard of legal costs and the culture of the US in order to maintain his idea of the most efficient market. He cannot assume that the US market would function the way he portrays in his hypothetical and simplified situations. As Professor Casey stated in class Americans tend to be more protective over their property than in other cultures. The United States is a highly individualistic culture and it seems to me that farmers or herders for example would be reticent to take on the weight of responsibility of damage due to negligence to their own property by their neighbors. While his arithmetic equations in his examples support his theory I see little probability of the US population embracing it to the point that it would be effective.
Coase admits that he does not include the transaction costs in his examples which I think could be very high due to the high price level of legal transactions.

Matt Benson said...

Coase’s argument seemed to me a warning to look before we leap in correcting market failures through government intervention. Coase suggests that the total net benefit of the policy should be weighed against the total net cost. This would include accounting for externalities of the externality correcting policy. In real world applications abiding by Coase’s argument could be very difficult and probably is impossible. There are so many unforeseen variables that will be affected from even small policies affecting a market. Additionally negative externalities have a tendency to harm those goods which don’t have prices which make it even more difficult to value the impact of the externality and any policy which could correct for it. I personally took from this article that when it comes to dealing with externalities that a cautionary approach should be taken because markets will sometimes be better off with the devil they know.

Matt Benson said...

Coase’s argument seemed to me a warning to look before we leap in correcting market failures through government intervention. Coase suggests that the total net benefit of the policy should be weighed against the total net cost. This would include accounting for externalities of the externality correcting policy. In real world applications abiding by Coase’s argument could be very difficult and probably is impossible. There are so many unforeseen variables that will be affected from even small policies affecting a market. Additionally negative externalities have a tendency to harm those goods which don’t have prices which make it even more difficult to value the impact of the externality and any policy which could correct for it. I personally took from this article that when it comes to dealing with externalities that a cautionary approach should be taken because markets will sometimes be better off with the devil they know.

Bobby Gorman said...

While Coase makes a convincing argument, I feel that he relies on examples that are far too simplistic. In his examples the costs and benefits of the externality are known in exact monetary values. It is the fact that the cost of damage of the externality and the profit made by producing the externality are known that allow negotiation. If the costs are unknown, which is the case with many pollutant externalities, then an efficient market for the externality will not form in the first place. As a hypothetical example, let's say a pollutant produced by a manufacturer in the Amazon causes air pollution that is unhealthy for humans. Under Coase's idea, the people affected by the pollution will come together and decide on a price that they need to pay the manufacturer to reduce pollution. They sum up the costs of their health problems caused by the pollutant and negotiate with the manufacturer to come to an agreement on the price they need to pay to stop the pollution. However, the market value of the pollution will most likely be skewed because of unforseen costs not thought of by the group of victims. Let's say the pollutant is also bringing harm to a species of plant in the rain forest that has no known use to mankind. The harm done to this plant will therefore have no cost and will not be included in the market price of the externality. If it turns out that the plant actually has the ability to cure a human disease, then it should have an economic value, which is being neglected by the market because of imperfect information. I would argue that a market for an externality such as pollution will basically always have market failures due to imperfect information, and it is therefore inefficient to let the market find the optimal level of an externality. I believe instead that the government should regulate externalities since the market is not capable of coming up with an accurate cost. I'm not saying the government would know the optimal level of the externality, but at least they could restrict the externality and the local people would not have pay a questionable market price in order to restrict it themselves.

Becca Bolton said...

In this paper, Coase presents his ideas on how to deal with firms that produce negative externalities. His arguments contrast the conventional ideas of Pigou, and he provides many examples where intervention in the market is not efficient or optimal. He does not believe that the factory (producer of the harmful effects) should be for liable for the damages that they cause to society. He strongly believes that the market powers will ultimately provide the most efficient level of output. Throughout the paper, Coase argues that negotiation and bargaining will solve any disputes between the firm and society. For the examples that he provides, his reasoning seems to make sense and shows that government intervention is not always the best option. But, as Kahn pointed out, these ideas may be too simplistic to apply to many of the current environmental problems.

Peter O'Donnell said...

I only agree with Coase that command and control by the government as a means to correct the negative externality is rather oppressive and authoritarian.

Since Coase argues from an ideal perspective, i.e. uses ideal conditions market conditions in his market (this was my understanding but I am not an economics major), I feel that he should view the government with an ideal perspective as well. I found section V in the paper irritating. I disagree with Coase when he says,"The government is, in a sense, a super-firm...Such authoritarian methods save a lot of trouble (for those doing the organizing)." I know that is almost an entire paragraph quoted so I will make quick points:
1) There is competition in the government just like in the market- political parties are always competing against one another for different government positions or to pass certain bills.
2) Theoretically, the government's power is given by the people who elected the officials to office. If a government official abuses his power, and the people disagree with the official's actions, then the person will probably be removed from office.

So if a firm pollutes a river, and the government says you cannot do that anymore without letting the people vote on a law, then either the people will agree with the governments actions and the firm is SOL if they cannot figure out how to produce without polluting the river, or the majority of people will protest the government's decision and remove the office from office then repeal his law.

Alli Shearin said...

In Coase’s article, he disagrees with the conclusions most economists in cases where the action of business firms have harmful effects on others. He says that it would not be appropriate or desirable for the owners of factories liable for damages caused to victims, or to make them pay a tax based on the damages they cause, because the allocation of resources will be the same in both an instance like this and in an instance where a business does not have to pay for damages. This happens, according to Coase, because if the damager doesn’t pay for damages, the victims could offer the damager money to reduce their damages. This would benefit the victims, and work out for the damagers because they would receive enough money so that producing more would not be necessary. I agree with Coase’s example, however, I think that he just assumes that the victims (in his example the farmer) would just be “willing” to pay to decrease harmful damages, when this may not necessarily be the case. For example, if smoke from factories harms citizens, they may not be able or willing to pay a company to reduce smoke.

I thought Coase made an extremely interesting point when he discussed the reciprocal nature of the problem in the beginning of the article, because I had never considered it this way. I have always just accepted the idea that A (a factory producing harmful smoke) inflicts harm upon B (a neighboring victim), and so A should be restrained. I never considered, however, that by restraining A to save B from harm, A is being harmed, which is why I thought Coase’s point was interesting. I don’t think the decision is as difficult as Coase implies in this particular situation though, because although either A or B is harmed, they are being harmed in significantly different ways. The cost for A is potential financial gain, and the cost for B is human health, and potentially a life. It is obvious, at least to me, that the cost for B is much greater than any amount of money A may not receive from being restrained.

Joe Moravec said...

I find three flaws in Coase's conclusions.

1. In his first example, Coase pits a farmer and rancher as neighbors negotiating the ideal values of each product, crops and cows. Coase concludes that it may even economically speaking be socially optimal to have the rancher pay the farmer to forgo cultivation of his fields in order to forgo paying for the damage done by his cows. However, I feel that Coase is in this case "discriminating against vegetarians." He fails to account for the supply and demand of crops. If the supply of crops falls to 0, even though the farmer and the rancher each has earned their living, the people in town have no crops to eat. This is a further externality born by consumers in the form of a total deficit of a necessary good, unaccounted for by Coase's model. In an extreme case, the loss of certain goods/creation of certain externalities could lead to market collapse, regarless of economic conditions (too much polution, lack of food, sudden shocks).

2. Coase fails to take into account the psychology of paying people to forgo their own income producing labor.

3. This leads to my third point. Coase argues that the farmer and the rancher will agree that the farmer forgo planting his crops because it is cheaper for the rancher to pay the farmer off and the farmer will make more money once he does. All else aside, this is also unrealistic. If the farmer is a profit maximizer, which he is assumed to be, he will buy a gun for $1, shoot the first cow to damage his land, sell the cow for $2, thereby making a $1 profit and maintaining present value of his crops. The farmer at this point has a net profit of $3 instead of the $2 the rancher would pay him off with, and it is now the responsibility of the rancher to insure that his cattle do not damage the farmer's crop. In truth, the farmer may even capture the cow, negotiate with the rancher to sell the cow back to him for the $2, still having a $3 profit while the rancher only loses $1. Either way, this is a much more realistic example of forgoing government intervention which I have personally witnessed and agree with. It is wrong to assume that the rancher does not have equal agency and should not be compensated beyond minimal payoff for his product nor allowed to protect his property. As I said, I have personally seen this solution to wandering cattle, and this is the reason why cattle fences are built and maintained by the rancher.

Joe Moravec said...

I find three flaws in Coase's conclusions.

1. In his first example, Coase pits a farmer and rancher as neighbors negotiating the ideal values of each product, crops and cows. Coase concludes that it may even economically speaking be socially optimal to have the rancher pay the farmer to forgo cultivation of his fields in order to forgo paying for the damage done by his cows. However, I feel that Coase is in this case "discriminating against vegetarians." He fails to account for the supply and demand of crops. If the supply of crops falls to 0, even though the farmer and the rancher each has earned their living, the people in town have no crops to eat. This is a further externality born by consumers in the form of a total deficit of a necessary good, unaccounted for by Coase's model. In an extreme case, the loss of certain goods/creation of certain externalities could lead to market collapse, regarless of economic conditions (too much polution, lack of food, sudden shocks).

2. Coase fails to take into account the psychology of paying people to forgo their own income producing labor.

3. This leads to my third point. Coase argues that the farmer and the rancher will agree that the farmer forgo planting his crops because it is cheaper for the rancher to pay the farmer off and the farmer will make more money once he does. All else aside, this is also unrealistic. If the farmer is a profit maximizer, which he is assumed to be, he will buy a gun for $1, shoot the first cow to damage his land, sell the cow for $2, thereby making a $1 profit and maintaining present value of his crops. The farmer at this point has a net profit of $3 instead of the $2 the rancher would pay him off with, and it is now the responsibility of the rancher to insure that his cattle do not damage the farmer's crop. In truth, the farmer may even capture the cow, negotiate with the rancher to sell the cow back to him for the $2, still having a $3 profit while the rancher only loses $1. Either way, this is a much more realistic example of forgoing government intervention which I have personally witnessed and agree with. It is wrong to assume that the rancher does not have equal agency and should not be compensated beyond minimal payoff for his product nor allowed to protect his property. As I said, I have personally seen this solution to wandering cattle, and this is the reason why cattle fences are built and maintained by the rancher.

Joe Moravec said...

I find three flaws in Coase's conclusions.

1. In his first example, Coase pits a farmer and rancher as neighbors negotiating the ideal values of each product, crops and cows. Coase concludes that it may even economically speaking be socially optimal to have the rancher pay the farmer to forgo cultivation of his fields in order to forgo paying for the damage done by his cows. However, I feel that Coase is in this case "discriminating against vegetarians." He fails to account for the supply and demand of crops. If the supply of crops falls to 0, even though the farmer and the rancher each has earned their living, the people in town have no crops to eat. This is a further externality born by consumers in the form of a total deficit of a necessary good, unaccounted for by Coase's model. In an extreme case, the loss of certain goods/creation of certain externalities could lead to market collapse, regarless of economic conditions (too much polution, lack of food, sudden shocks).

2. Coase fails to take into account the psychology of paying people to forgo their own income producing labor.

3. This leads to my third point. Coase argues that the farmer and the rancher will agree that the farmer forgo planting his crops because it is cheaper for the rancher to pay the farmer off and the farmer will make more money once he does. All else aside, this is also unrealistic. If the farmer is a profit maximizer, which he is assumed to be, he will buy a gun for $1, shoot the first cow to damage his land, sell the cow for $2, thereby making a $1 profit and maintaining present value of his crops. The farmer at this point has a net profit of $3 instead of the $2 the rancher would pay him off with, and it is now the responsibility of the rancher to insure that his cattle do not damage the farmer's crop. In truth, the farmer may even capture the cow, negotiate with the rancher to sell the cow back to him for the $2, still having a $3 profit while the rancher only loses $1. Either way, this is a much more realistic example of forgoing government intervention which I have personally witnessed and agree with. It is wrong to assume that the rancher does not have equal agency and should not be compensated beyond minimal payoff for his product nor allowed to protect his property. As I said, I have personally seen this solution to wandering cattle, and this is the reason why cattle fences are built and maintained by the rancher.

Joe Moravec said...

I find three flaws in Coase's conclusions.

1. In his first example, Coase pits a farmer and rancher as neighbors negotiating the ideal values of each product, crops and cows. Coase concludes that it may even economically speaking be socially optimal to have the rancher pay the farmer to forgo cultivation of his fields in order to forgo paying for the damage done by his cows. However, I feel that Coase is in this case "discriminating against vegetarians." He fails to account for the supply and demand of crops. If the supply of crops falls to 0, even though the farmer and the rancher each has earned their living, the people in town have no crops to eat. This is a further externality born by consumers in the form of a total deficit of a necessary good, unaccounted for by Coase's model. In an extreme case, the loss of certain goods/creation of certain externalities could lead to market collapse, regarless of economic conditions (too much polution, lack of food, sudden shocks).

2. Coase fails to take into account the psychology of paying people to forgo their own income producing labor.

3. This leads to my third point. Coase argues that the farmer and the rancher will agree that the farmer forgo planting his crops because it is cheaper for the rancher to pay the farmer off and the farmer will make more money once he does. All else aside, this is also unrealistic. If the farmer is a profit maximizer, which he is assumed to be, he will buy a gun for $1, shoot the first cow to damage his land, sell the cow for $2, thereby making a $1 profit and maintaining present value of his crops. The farmer at this point has a net profit of $3 instead of the $2 the rancher would pay him off with, and it is now the responsibility of the rancher to insure that his cattle do not damage the farmer's crop. In truth, the farmer may even capture the cow, negotiate with the rancher to sell the cow back to him for the $2, still having a $3 profit while the rancher only loses $1. Either way, this is a much more realistic example of forgoing government intervention which I have personally witnessed and agree with. It is wrong to assume that the rancher does not have equal agency and should not be compensated beyond minimal payoff for his product nor allowed to protect his property. As I said, I have personally seen this solution to wandering cattle, and this is the reason why cattle fences are built and maintained by the rancher.

Joe Moravec said...

I find three flaws in Coase's conclusions.

1. In his first example, Coase pits a farmer and rancher as neighbors negotiating the ideal values of each product, crops and cows. Coase concludes that it may even economically speaking be socially optimal to have the rancher pay the farmer to forgo cultivation of his fields in order to forgo paying for the damage done by his cows. However, I feel that Coase is in this case "discriminating against vegetarians." He fails to account for the supply and demand of crops. If the supply of crops falls to 0, even though the farmer and the rancher each has earned their living, the people in town have no crops to eat. This is a further externality born by consumers in the form of a total deficit of a necessary good, unaccounted for by Coase's model. In an extreme case, the loss of certain goods/creation of certain externalities could lead to market collapse, regarless of economic conditions (too much polution, lack of food, sudden shocks).

2. Coase fails to take into account the psychology of paying people to forgo their own income producing labor.

3. This leads to my third point. Coase argues that the farmer and the rancher will agree that the farmer forgo planting his crops because it is cheaper for the rancher to pay the farmer off and the farmer will make more money once he does. All else aside, this is also unrealistic. If the farmer is a profit maximizer, which he is assumed to be, he will buy a gun for $1, shoot the first cow to damage his land, sell the cow for $2, thereby making a $1 profit and maintaining present value of his crops. The farmer at this point has a net profit of $3 instead of the $2 the rancher would pay him off with, and it is now the responsibility of the rancher to insure that his cattle do not damage the farmer's crop. In truth, the farmer may even capture the cow, negotiate with the rancher to sell the cow back to him for the $2, still having a $3 profit while the rancher only loses $1. Either way, this is a much more realistic example of forgoing government intervention which I have personally witnessed and agree with. It is wrong to assume that the rancher does not have equal agency and should not be compensated beyond minimal payoff for his product nor allowed to protect his property. As I said, I have personally seen this solution to wandering cattle, and this is the reason why cattle fences are built and maintained by the rancher.

Joe Moravec said...

I find three flaws in Coase's conclusions.

1. In his first example, Coase pits a farmer and rancher as neighbors negotiating the ideal values of each product, crops and cows. Coase concludes that it may even economically speaking be socially optimal to have the rancher pay the farmer to forgo cultivation of his fields in order to forgo paying for the damage done by his cows. However, I feel that Coase is in this case "discriminating against vegetarians." He fails to account for the supply and demand of crops. If the supply of crops falls to 0, even though the farmer and the rancher each has earned their living, the people in town have no crops to eat. This is a further externality born by consumers in the form of a total deficit of a necessary good, unaccounted for by Coase's model. In an extreme case, the loss of certain goods/creation of certain externalities could lead to market collapse, regarless of economic conditions (too much polution, lack of food, sudden shocks).

2. Coase fails to take into account the psychology of paying people to forgo their own income producing labor.

3. This leads to my third point. Coase argues that the farmer and the rancher will agree that the farmer forgo planting his crops because it is cheaper for the rancher to pay the farmer off and the farmer will make more money once he does. All else aside, this is also unrealistic. If the farmer is a profit maximizer, which he is assumed to be, he will buy a gun for $1, shoot the first cow to damage his land, sell the cow for $2, thereby making a $1 profit and maintaining present value of his crops. The farmer at this point has a net profit of $3 instead of the $2 the rancher would pay him off with, and it is now the responsibility of the rancher to insure that his cattle do not damage the farmer's crop. In truth, the farmer may even capture the cow, negotiate with the rancher to sell the cow back to him for the $2, still having a $3 profit while the rancher only loses $1. Either way, this is a much more realistic example of forgoing government intervention which I have personally witnessed and agree with. It is wrong to assume that the rancher does not have equal agency and should not be compensated beyond minimal payoff for his product nor allowed to protect his property. As I said, I have personally seen this solution to wandering cattle, and this is the reason why cattle fences are built and maintained by the rancher.

Colin Elliott said...

Coase reiterates that Frank Knight said that "problems of welfare economics must ultimately dissolve into a study of aesthetics and morals." It seems apparent that perhaps Pigou is not misunderstanding what is beneficial for society but instead Coase, with a lack of broader insight. While all of his examples of the positive impact of eliminating government involvement are based on a one-to-one conflict of interest, he fails to see that the "factor of production" or property right to produce smoke has costs to the entire world and not just one's neighbors. Furthermore, in the case of Boulston, Coase asserts that he who allows rabbits to spawn and kill his neighbor's crops and damage his neighbor's property should not be liable because the neighbor has the ability to kill the rabbits. Clearly, he has a fundamental problem with understanding responsibility. As is illustrated in Australia, by the widespread agricultural destruction brought on by the introduction of rabbits, seemingly small problems when done on a large scale, like pollution, can have unintended massive consequences. In the example of uncompensated damage to forests and crops by railway engines, although law may protect trains that are properly licensed, rather than abandoning the use of trains if payment was required, thus making the use of trains more expensive than abandoning their use, investment in technology to shield the sparks from spraying would ultimately benefit the forests and crops as well as having less financial burden on train companies. In conclusion, while the opportunity cost of a particular event may be less than with government intervention, on a larger scale and with the future in mind, government intervention can prove crucial.

michelle said...

All the arguments Coase makes of efficient allocation of resources and production in a free market in his examples are logical, though very much simplified. His argument of no government intervention makes sense in that sometimes it is more expensive to try to control the externalities, the gain of less pollution may be less than the cost of controlling the pollution. It was interesting how he called the government a superfirm, it's an novel way to think about the reasons for government behaviors.
I feel the argument Coase made against Pigou theory was a little obscure, the example Coase used doesn't generalize well, he is almost using exceptions to deconstruct an theory. But his consideration of costs and benefits was thorough, thought incomplete at times due to imperfect information. However, despite the mathematical "proofs" he exhibited, his reasoning for the theory of no government intervention was over simplified.

curriee13 said...

The idea of the “reciprocal nature of the problem” is one of the most important factors is determining the cost/benefit analysis of the issue of externalities especially those that affect other individuals/companies (does A have the positive right to pollute or does B have the negative right to not incur the consequences of A’s pollution). It is often very difficult to determine the costs and benefits for each party while taking into consideration the costs/benefits for society as a whole, and can rarely (if not never) be achieved by mutual agreements drawn up by the parties involved. This is where government intervention is the marketplace becomes necessary, knowing that this involvement will create its own cost. It is natural for people/companies to act in their own self-interest, therefore it is necessary for such a third party to determine the best decision for society whether the community be local or global.

Elise Parker said...

Coase’s argument was much more thorough than the book’s summary made it appear. The text argues that Coase assumes that there are minimal transaction costs – which he does in the beginning. But in section 5 he clearly outlines the cost of market transactions. If the legal costs and operations of market transactions are too great, he suggests that the formation of a firm or government intervention could achieve a similar result at a lower cost. He disagrees with government intervention , but admits that on occasion government regulation can lead to an improvement in efficiency. He also points out that it may be better not to take action about the problem at all if the cost of regulation is greater than the gains achieved.
I think he also makes a sensible argument in section 6 with regards to determining the optimal level of pollution. Kahn argues that Coase believes the market will automatically generate the optimal level of the externality. But Coase merely points out that one needs to consider if the gains of intervention by the legal system are greater than the losses suffered by stopping the action, and notes that there may be real dangers in “extensive government intervention…that leads to the protection of those responsible for harmful effects being carried too far”. Coase furthers this point with the train illustration borrowed from Pigou. He notes that it is government regulation that protects the trains from having to pay damages in the event of a fire, whereas Pigou felt it was “state action [that would] improve upon ‘natural’ tendencies”. Coase notes that it is faulty to think it always desirable to make the offending party pay for damages – that striking a bargain would be useful, and that liability is a concern only when bargaining is too expensive.
This strikes me as a reasonable point of view. Yes, Coase’s argument above applies to the market on a smaller scale, but as was mentioned in Section 5 he is not against government intervention on the grounds that the cost of the intervention is not greater than the gains.

Alli Shearin said...

In Coase’s article, he disagrees with the conclusions most economists in cases where the action of business firms have harmful effects on others. He says that it would not be appropriate or desirable for the owners of factories liable for damages caused to victims, or to make them pay a tax based on the damages they cause, because the allocation of resources will be the same in both an instance like this and in an instance where a business does not have to pay for damages. This happens, according to Coase, because if the damager doesn’t pay for damages, the victims could offer the damager money to reduce their damages. This would benefit the victims, and work out for the damagers because they would receive enough money so that producing more would not be necessary. I agree with Coase’s example, however, I think that he just assumes that the victims (in his example the farmer) would just be “willing” to pay to decrease harmful damages, when this may not necessarily be the case. For example, if smoke from factories harms citizens, they may not be able or willing to pay a company to reduce smoke.

I thought Coase made an extremely interesting point when he discussed the reciprocal nature of the problem in the beginning of the article, because I had never considered it this way. I have always just accepted the idea that A (a factory producing harmful smoke) inflicts harm upon B (a neighboring victim), and so A should be restrained. I never considered, however, that by restraining A to save B from harm, A is being harmed, which is why I thought Coase’s point was interesting. I don’t think the decision is as difficult as Coase implies in this particular situation though, because although either A or B is harmed, they are being harmed in significantly different ways. The cost for A is potential financial gain, and the cost for B is human health, and potentially a life. It is obvious, at least to me, that the cost for B is much greater than any amount of money A may not receive from being restrained.

Van Nguyen said...

After reading Ronald H. Coase's The Problem of Social Cost, I found that Coase in fact is aware of the potential critiques that readers would pose on him, such as the assumption of zero transaction cost, the generalization of the one-to-one negotiation scenario to multi-player rounds of negotiation, etc. In fundamentals, he was describing what a market is supposed to work when people act according to their self-interest so that the implied price mechanism in the externality case would allow both sides to come to an optimal solution without an initial assignment of property rights.

I found his arguments to be very persuasive but only in the context that he clearly assigns a price/monetary/numeric signal to the trade-off between the cow-rancher and the farmer. He is rather realistic when addressing both cases of clear property rights and no property rights, making Pigouvian system look a bit like an ideal world. At the same time, this line of argument does not consider that information costs money, a lot of money, and therefore, having rounds of negotiation or having a price-appropriate signal for this externality market to develop is extremely difficult.

At the same, Coase's paper can boiled down to two words - opportunity cost. He points out clearly a fact that people seem to willingly overlook: government intervention policies have cost. The opportunity cost of implementing government intervention means a disruption in the efficient market mechanism in allocating resources since using one thing means one cannot use it for another purpose. At the same time, what is the definition of property rights and whether we actually have property rights? As Coase points out "A system in which the rights of individuals were unlimited would be one in which there were no rights to acquire" because there is no possible way that one cannot infringe on another's property rights without possessing his own rights. I found this argument fascinating.

Wendelbo said...

On page 8, Coase surprised me. We have been told that he is the protector of classical economics, but here he clearly reveals his socialist intentions. He says of the great properties of a firm: “the firm would acquire the legal rights of all parties and the re-arrangement of activities would not follow on a rearrangement of rights by contract, but as a result as a result of an administrative decision as to how the rights should be used”. That is, centralizing decisions at a greater scale will remove transaction cost and create a better allocation of resources. Clearly, this is a metaphor for how we should give up our rights to the government in the name of efficiency! After all, he says, “The government is, in a sense, a super firm”. He goes on to talk about why this might not be true… but if he said it once in the whole piece, it MUST be the core of what he thinks.
Jokes aside, Coase is on to something interesting. From a purely mathematical stand point, and perhaps even in terms of efficient allocation, it seems that in a number of cases where we have thought it necessary to intervene, perhaps we do not have to. But, we deal in the numbers of millions, typically, when we talk of environmental externalities, so the transaction costs may very well be enormous. In economic analysis he need not be aware (or concerned with) the social issues, but he hints nonetheless to some of them. Consider, for example, two issues with leaving it up to the market. Fairness issues aside: First, he proposes that the government must simply assign property right and then let the market negotiate, but he also says that “what payment would in fact be made would depend on the shrewdness of the farmer and cattle-rancher” – but, it is not hard to imagine a situation in which these are not family farms but instead a large company dealing with a small farm – shrewdness then, is in favor of one side and this can affect allocation. Second, these negotiations can take place where property rights, general law and so on sets the limits for this bargain, leveling the playing field so to speak. But, with environmental externalities in particular some issues are of such grand size that they may only be bargained at the national or international level. That is, it becomes POLITICS. Here, however, rules of bargaining exist only scarcely, and I am curious to know if this would have any different effect than the one Coase explains.

Wendelbo said...

On page 8, Coase surprised me. We have been told that he is the protector of classical economics, but here he clearly reveals his socialist intentions. He says of the great properties of a firm: “the firm would acquire the legal rights of all parties and the re-arrangement of activities would not follow on a rearrangement of rights by contract, but as a result as a result of an administrative decision as to how the rights should be used”. That is, centralizing decisions at a greater scale will remove transaction cost and create a better allocation of resources. Clearly, this is a metaphor for how we should give up our rights to the government in the name of efficiency! After all, he says, “The government is, in a sense, a super firm”. He goes on to talk about why this might not be true… but if he said it once in the whole piece, it MUST be the core of what he thinks.
Jokes aside, Coase is on to something interesting. From a purely mathematical stand point, and perhaps even in terms of efficient allocation, it seems that in a number of cases where we have thought it necessary to intervene, perhaps we do not have to. But, we deal in the numbers of millions, typically, when we talk of environmental externalities, so the transaction costs may very well be enormous. In economic analysis he need not be aware (or concerned with) the social issues, but he hints nonetheless to some of them. Consider, for example, two issues with leaving it up to the market. Fairness issues aside: First, he proposes that the government must simply assign property right and then let the market negotiate, but he also says that “what payment would in fact be made would depend on the shrewdness of the farmer and cattle-rancher” – but, it is not hard to imagine a situation in which these are not family farms but instead a large company dealing with a small farm – shrewdness then, is in favor of one side and this can affect allocation. Second, these negotiations can take place where property rights, general law and so on sets the limits for this bargain, leveling the playing field so to speak. But, with environmental externalities in particular some issues are of such grand size that they may only be bargained at the national or international level. That is, it becomes POLITICS. Here, however, rules of bargaining exist only scarcely, and I am curious to know if this would have any different effect than the one Coase explains.

Kelly Cossey said...

Coase’s theorem, when applied to his example of the farmer and the cattle rancher, makes sense, but becomes more and more complicated when applied to the issue of environmental economics. I think his ideas work when there is only one polluter and one victim, but rarely are our environmental problems ever that simple. As Kahn points out, Coase assumes zero transaction costs, but this assumption doesn’t hold because there are typically multiple polluters and multiple victims. The assignment of property rights is also an important issue. In many cases of polluter vs. victim, I would argue the victim has property rights and actions should be taken to reduce the amount of pollution. Access to clean air should be a basic right, and if the market doesn’t work itself out so that victims are granted this access, I believe the government should step in to take corrective action. I believe Coase does succeed in encouraging us to be cautious about government intervention. I don’t think it should be the first action taken in every case, but in some cases I would definitely deem it necessary.