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The article does a poor job of describing the Coase Theorem. This New Yorker article [1] does a much better job. I like the example they give, which comes from

The article does a poor job of describing the Coase Theorem. This New Yorker article [1] does a much better job. I like the example they give, which comes from Coase's paper: "To illustrate this, Coase used the example of a cattle farmer’s herd straying onto the cultivated fields of a neighboring grain farmer. If the law said the cattle farmer was legally responsible, then mostly likely he would end up paying for the cost of a new fence. If putting up a fence was prohibitively expensive, he might end up paying the grain farmer for the occasional damage to his crops. But what if the cattle farmer wasn’t legally responsible, perhaps because the property lines were unclear? In these circumstances, Coase said, the grain farmer would likely end up paying for a fence. Or, if the grain farmer believed that constructing a fence would be more costly than the occasional damage done by straying cattle, he would reluctantly accept the odd incursion. The assignment of property rights would determine who pays. But from a broader economic point of view, Coase argued, the outcome would essentially be the same, regardless." This doesn't hold up in real life with negative externalities and transaction costs. The article cites an example of pollution, but pollution can affect thousands of people, and there's no way to get all of them together to reach an efficient outcome without transaction costs. [1] http://www.newyorker.com/online/blogs/johncassidy/2013/09/ronald-coase-and-the-misuse-of-economics.html http://www.newyorker.com/online/blogs/johncassidy/2013/09/ro...

bcoates 13y ago
The Volokh Conspiracy had some good posts today about how the Coase theorem doesn't ignore externalities and transaction costs: it demonstrates that externalities are a distraction (since they aren't, on their own, enough to explain why a laissez faire isn't perfectly efficient). Transaction costs combined with some arbitrary set of property rights are sufficient on their own to entirely capture the problems people use "externalities" to explain, but much more amenable to reasoning about and fixing. To come back to the pollution example, it doesn't matter if the factory has the right to pollute or the people have the right to clean air: what matters is that transaction costs prevent them from working out their competing interests without intervention. http://www.volokh.com/2013/09/02/coase-externalities/ http://www.volokh.com/2013/09/02/coase-externalities/ http://www.volokh.com/2013/09/03/coase/ http://www.volokh.com/2013/09/03/coase/
- conjectures 13y ago
  'Transaction costs combined with some arbitrary set of property rights' Surely this means assuming the externality is covered by property rights. In which case it's no longer really an externality. In practical terms assuming adequate property rights is assuming half the problem away.
  - jsfy 13y ago
    I'm not sure I know what you mean by an externality being "covered" by property rights. An externality arises when the social cost or benefit is different from the private cost of an action. I assume you are talking about having the actor internalize the costs of the externality by expanding the scope of his property rights. However, I think the parent post was just referring to a result of the Coase theorem. Namely that, no matter the initial allocation of property rights, externalities can be traded away, as long as there are no transaction costs. In practice, negotiating away externalities is questionable for other reasons too, like contract credibility. E.g, if I were to pay someone in front of me on a plane not to recline their seat, they might just pocket the cash and recline anyway.
    - conjectures 13y ago
      "Namely that, no matter the initial allocation of property rights" Under the assumption that property rights can and have been allocated and can be and are enforced. This is more a point about how the Coase theorem gets interpreted rather than about a flaw in it.
SilasX 13y ago
Better summary: pay extortionists, but only if transaction costs are low!

bcoates 13y ago

The Volokh Conspiracy had some good posts today about how the Coase theorem doesn't ignore externalities and transaction costs: it demonstrates that externalities are a distraction (since they aren't, on their own, enough to explain why a laissez faire isn't perfectly efficient). Transaction costs combined with some arbitrary set of property rights are sufficient on their own to entirely capture the problems people use "externalities" to explain, but much more amenable to reasoning about and fixing. To come back to the pollution example, it doesn't matter if the factory has the right to pollute or the people have the right to clean air: what matters is that transaction costs prevent them from working out their competing interests without intervention. http://www.volokh.com/2013/09/02/coase-externalities/ http://www.volokh.com/2013/09/02/coase-externalities/ http://www.volokh.com/2013/09/03/coase/ http://www.volokh.com/2013/09/03/coase/

conjectures 13y ago
'Transaction costs combined with some arbitrary set of property rights' Surely this means assuming the externality is covered by property rights. In which case it's no longer really an externality. In practical terms assuming adequate property rights is assuming half the problem away.
- jsfy 13y ago
  I'm not sure I know what you mean by an externality being "covered" by property rights. An externality arises when the social cost or benefit is different from the private cost of an action. I assume you are talking about having the actor internalize the costs of the externality by expanding the scope of his property rights. However, I think the parent post was just referring to a result of the Coase theorem. Namely that, no matter the initial allocation of property rights, externalities can be traded away, as long as there are no transaction costs. In practice, negotiating away externalities is questionable for other reasons too, like contract credibility. E.g, if I were to pay someone in front of me on a plane not to recline their seat, they might just pocket the cash and recline anyway.
  - conjectures 13y ago
    "Namely that, no matter the initial allocation of property rights" Under the assumption that property rights can and have been allocated and can be and are enforced. This is more a point about how the Coase theorem gets interpreted rather than about a flaw in it.

SilasX 13y ago

Better summary: pay extortionists, but only if transaction costs are low!