Coase's Theorum
Fred Foldvary, Mason Gaffney, Mike O'Mara,
Harry Pollard, Dan
Sullivan and others
[Reprinted from the online Land-Theory
discussion group; May 1999]
Mike O'Mara wrote: (5/16/99):
Occasionally, someone who advocates purely allodial landownership
will mention Coase's theorem, claiming that it supports an allodial
policy. The version some of them give is so broad that they claim
Coase said the result of economic transactions would be the same
regardless of how land and other resources were initially
distributed.
It seemed a little hard to believe Coase really said that, so I
finally borrowed the university library's copy of Coase's 1988 book,
The Firm,the Market, and the Law. It contains his original
1960 article from the Journal of Law and Economics: "The
Problem of Social Cost" (the thesis of which Stigler named "the
Coase theorem"), and also includes a chapter with Coase's
response to authors who have misinterpreted his theorem (that
chapter is titled "Notes on the Problem of Social Cost").
It turns out that in his theorem, Coase is actually critiquing
orthodox economics, while offering a suggested refinement of it. His
theorem might have some interesting implications for land policy and
property rights.
Critique of Orthodox Economics
The Coase theorem focuses on the role of transaction costs in
disputes involving neighboring properties. Coase's 1960 article was
addressing negative externalities, such as a factory smokestack
polluting the neighbors, or cattle destroying a nearby farmer's
crops. Coase argued that, regardless of what the law says about who
is liable, the economic outcome, including the distribution of
wealth, would be the same, if transaction costs were zero.
Contrary to many misinterpretations of Coase's theorem, he made it
clear that transaction costs are rarely close to zero, and in fact
sometimes transaction costs are so high that negotiations and
contracts do not take place.
So, an important point of Coase's theorem was actually to
criticize and refine orthodox economic models, which had usually
been based on the strange assumption that transaction costs are
zero. Of course, orthodox economists' models also commonly assume
that economic activity takes place in a vacuum, requiring neither
space, time, nor even any energy inputs for production. (It's
possible that some of these same economists may have first
considered going into biology, but probably could not find funding
for their theories about the wing structures of pigs.)
Level of Output
In his example of a factory smokestack polluting the neighborhood,
Coase compares the case where the law makes the factory liable for
the pollution and makes it pay for damages, versus the case where
the law does not hold the factory liable, so more people choose not
to locate there.
He argues that the level of smoke output would be the same either
way, and the distribution of wealth would be the same, regardless of
what the law is regarding liability, if transaction costs
were zero.
For example, suppose the law required the factory to pay for
damages. In that case, if more people then move into the vicinity,
the factory would have to pay more pollution damages since more
people would be involved. But in that case, people who move into the
vicinity would not take into account the additional cost and reduced
production resulting from their presence.
So, Coase concludes that merely making the factory liable for
pollution damages is not necessarily the optimal solution, depending
on the situation. On the one hand, if there is no fine or tax on
pollution, there might be too much smoke and too few people in the
vicinity, but on the other hand, with the fine or pollution tax
there may be too little smoke and too little production, and too
many people in the vicinity.
If transaction costs were zero, then the people involved could
negotiate and make contracts to reach an optimal solution. But since
transaction costs might be extremely high, Coase notes that public
policy needs to take account of the kinds of effects noted.
Distribution of Wealth
He explains why the distribution of wealth would not be affected
by what the law is regarding liability for negative externalities,
if transaction costs were zero. Suppose the law requires a rancher
to compensate a farmer for crops destroyed by wandering cattle. If
so, the amount the rancher would pay for leasing the land would be
lower by that same amount, while the farmer's lease would then be
higher by that amount. So the distribution of wealth between the two
would be the same either way.
The landowners would also wind up with the same distribution of
wealth, regardless of the liability law, if transaction
costs were zero. If the liability law were known ahead of time, then
the land prices would reflect it, so that the resulting lower or
higher price of land would offset the law's effect on the income
from leasing the land.
Changes in Property Rights
But Coase goes further and points out that, even if the liability
law changed later, there would still be no change in the
distribution of wealth, if transaction costs were zero. That
would be the case because, if transaction costs were zero, it would
cost nothing to include elaborate conditions in contracts, such as
specifying how payments owed would vary if there were changes in the
law.
Coase points out that the one case where the distribution of
wealth would be different even if transaction costs were zero is the
case where previously unrecognized rights arise, such as happened
when it was decided that each individual has a right to be free from
slavery. In the case of a right that was previously unrecognized,
contracts would not have clauses already prepared for that
contingency.
His conclusion could be applied to the case where there are
changes in basic property rights, such as rights to ownership of
land. For example, suppose the law were changed so as to endorse
some version of land reform or land rent reform, such as Georgist
views of rights to land rent. In that case, Coase would agree that
the distribution of wealth would be different, even if there were
zero transaction costs.
Coase mentions in a passing sentence that he agrees with Steven
Cheung's point that, if transaction costs are zero, then the Coase
theorem does not even have to assume the existence of private
property rights. But he does not elaborate on that point. Maybe he
and Cheung meant that if transaction costs are zero, then there
would be no cost in reaching agreement on rules of property rights.
Anyone who has ever been involved in politics would immediately
recognize that the continuing lack of any such agreement on property
rights shows the validity of Coase's point about the role of
transaction costs.
***
Mase Gaffney, responding to Mike O'Mara (5/23/99):
Thanks for this helpful summary on Coase. However, I think you are
a little too easy on him.
If widow W owns a house and lot, and Builder B wants to buy the
lot for an apartment, W can say she will not sell at any price. B
cannot equal that by offering to pay any price, so W keeps the land
because she has the entitlement, even though B has more money. The
entitlement gives W the equivalent of billions of $$$.
In recent years, economists doing "contingent valuation"
studies have established that Willingness to Pay (WTP) for something
you don't own is alot lower than Willingness to Accept (WTA) payment
for the same thing if you do own it.
Can send vast lit. on subject, if you want.
Fred Foldvary, responding to Mase Gaffney (5/24/99):
Still, the contingent valuation (CV) people are dealing with
exactly the case you cite, i.e. when widow W strews her yard with
garbage. Only, in this case widow W is the Exxon Valdez. How much is
the beach worth that got oiled? Ask the locals what they would pay
to have a clean beach, and get a low figure; ask them what Exxon
must pay them to dump oil on theclean beach that THEY OWN, and get a
much higher figure.
If there are zero transaction costs, and there are on-going oil
spills, then Coase said if the property rights rest with the locals,
Exxon has the choice of either paying what the locals demand when
there is a spill, or paying the cost of preventing the spills, and
Exxon will do whatever is the lower cost. This was contra Pigou, who
said simply Exxon should pay the social cost. Not so, said Coase, if
it is less costly to avoid the spill. The point was to take all
relevant costs into account. Seems to me that the relevant cost
would be what the locals would pay to have a clean beach. What Exxon
must pay to dump oil is the sum of what they would pay for a clean
beach plus the premium they demand because they already own it and
have psychological attachments to it.
***
Mike O'Mara wrote (5/22/99):
So, an important point of Coase's theorem was actually to
criticize and refine orthodox economic models, which had usually
been based on the strange assumption that transaction costs are
zero. Of course, orthodox economists' models also commonly assume
that economic activity takes place in a vacuum, requiring neither
space, time, nor even any energy inputs for production.
It might be interesting to ask to what extent the peculiar
economicassumption that information has no cost might be related to
the effect of removing land from economics. In The Corruption of
Economics, MasonGaffney described the effect of the
neo-classical assumption of a steady-state, timeless economy: it
hides the difference between land and capital goods, because capital
goods take time to produce, whereas land cannot be produced at all.
An effect of assuming a timeless, steady-state economy in
neo-classical economics is that it also seems to require the
assumption of perfect information: transactions are costless, and no
new inventions occur because everyone is all-knowing. Also, it
implies that land speculation would not occur, because people
already know what land prices will be.
So apparently, the same corruption that gave us a landless
economics also gave us the equally absurd notion of costless
information and all-knowing participants in the economy. The
Corruption of Economics also suggests that the field of
macroeconomcis was invented as a means to reintroduce time into
economics, in order to deal with the business cycle. So, it's
relevant to note that some of the economists who are now attempting
to derive the microeconomic foundations of macroeconomics are
applying search models, where information has a cost, resulting in
disequilibrium.
Mase Gaffney, responding to Mike O'Mara (5/22/99):
It's interesting how theorists will build models with wildly
unrealistic premises, and then a few years later see a need to
re-enter what they assumed away, and treat it like a new idea, a new
field, several new careers! Hence, "information theory"
etc.
Nic has pointed out the importance of the concept of "winner's
curse,"where the high bidder for land is often not the best
informed, but simply the most optimistic.
That approach could potentially include not only the role of
information costs in affecting unemployment, spending, and
inflation, but also its role in land speculation and land markets.
***
Mase Gaffney wrote:
Thanks for this helpful summary on Coase. However, I think you are
alittle too easy on him. ...
Mike O'Mara, responding to Mase Gaffney (5/23/99):
In recent years, economists doing "contingent valuation"
studies have established that Willingness to Pay (WTP) for something
you don't own is alot lower than Willingness to Accept (WTA) payment
for the same thing ifyou do own it.
From what I've read of Coase so far, I'm not sure the Coase
theorem is meant to apply to cases other than where there is a
negative externality. For example, he discusses such cases as a
factory emitting smoke, or cattle wandering over and destroying a
farmer's crops.
So, the Coase theorem might not apply to a case like the one you
mentioned. Suppose instead that there is a negative externality
involved, such as the widow leaving her garbage in the back yard,
and it attracted rats.
By the Coase theorem, the solution reached by her and her
neighbors would be the same whether or not she was held liable,
if transaction costs were zero. Or, put another way, the only
reason the solutions might diverge in the two different conditions
of liability would be if transaction costs are much greater than
zero.
In any case, from reading the two Coase articles, I was glad to
find that, contrary to what I've seen some allodialists claim, the
Coase theorem does not say that the outcome of transactions is
unaffected by the initial distribution of land or other resources.
First, Coase pointed out that most trades involve transaction costs
well above zero, so that would change the outcome.
Second, Coase stated that, even if transaction costs were close to
zero,the distribution of wealth would still be affected if a law is
introduced that upholds a right that was previously not recognized.
He gives the example of introducing an anti-slavery law, but the
same would apply if a new right to land access was eventually
recognized.
I appreciate the contributions of Coase and any other economist
who critiques the unrealistic axioms of neo-classical orthodoxy.
Just as Georgist economists are making the valuable contribution of
showing the necessity of including land in economic theory,
similarly, Coase and some others are demonstrating the necessity of
including information costs.
The two approaches can actually complement each other, because
both wind up opposing the orthodox neo-classical model of a
steady-state, timeless economy, with its seriously unrealistic
implications, such as no difference between land and produced goods,
no business cycle, and no land speculation.
***
Mase Gaffney: responding to Mike O'Mara (5/24/99):
The more I read about Coase's original article, the more it seems
the Coasians, led by Stigler, have misused it. Clearly, it's high
time I read Coase myself. Past time!
***
[Fred Foldvary wrote (5/24/99):
Still, the contingent valuation (CV) people are dealing with
exactly the case you cite, i.e. when widow W strews her yard with
garbage. ...]
Mase Gaffney, responding to Fred Foldvary (5/26/99):
I doubt that Pigou overlooked the other possibility. IF he failed
to mention it, it would have been because he just assumed his
readers would consider that too obvious to mention.
Fred Foldvary responding to Mase Gaffney (5/26/99):
Not so, said Coase, if it is less costly to avoid the spill. The
point was to take all relevant costs into account. Seems to me that
the relevant cost would be what the locals would pay to have a clean
beach. What Exxon must pay to dump oil is the sum of what they would
pay for a clean beach plus the premium they demand because they
already own it
Mase Gaffney, responding to Fred Foldvary (5/26/99):
That's the point, yes. However, don't modify the point by calling
it "psychological." It's a matter of purchasing power: a
wealth effect. This, I think, is what Coasians have papered over, or
minimized, or trivialized -- and it's their Achilles' Heel.
Fred Foldvary, responding to Mase Gaffney (5/26/99):
... and have psychological attachments to it.
***
Mase Gaffney wrote (5/27/99):
In Pigou's A Study in Public Finance, p.99, he makes it
pretty clear that the purpose of his proposed effluent tax was not
primarily to punish offenders, but to "correct maladjustments"
by taxing uses that are "pushed too far" in the market. He
also proposes subsidizing other uses that are not pushed far enough.
Pigou is a very clipped writer, he doesn't wave a flag at every
point, but the point is there.
Mike O'Mara, responding to Mase Gaffney (5/27/99):
That summary of Pigou's point seems compatible with Coase's
summary: "...Pigou's basic position was that, when defects were
found in the working of the economic system, the way to put things
right was through some form of government action...."
But in contrast to Pigou, Coase emphasized that, before
automaticallyconcluding whether government action is the best way to
deal with such externalities, first it's necessary to look at the
relative information costs of different approaches.
"Tradable permit" schemes, derived from Coase,
presuppose government action to create the permits, so I think their
champions are sailing under false colors and twisting the issues,
when they paint themselves as libertarians of some kind.
Fred Foldvary, responding to Mase Gaffney (5/26/99):
If there are zero transaction costs, and there are on-going oil
spills, then Coase said if the property rights rest with the locals,
Exxon has the choice of either paying what the locals demand when
there is a spill, or paying the cost of preventing the spills, and
Exxon will do whatever is the lower cost. This was contra Pigou, who
said simply Exxon should pay the social cost.
Mike O'Mara, responding to .................... (5/26/99)
Stigler's way of stating the Coase theorem is that, if
transaction costs were zero, then private costs and social costs
would be equal.
Coase summarizes Pigou's position on externalities as follows: "...Pigou's
basic position was that, when defects were found in the working of
the economic system, the way to put things right was through some
form of government action," such as taxes, fines, or assigning
of liability.
Samuelson's summary of Pigou's position was similar: "...his
doctrine holds that ... where there are technological external
economies or diseconomies, ...there is a prima facie case
for intervention."
But Coase points out that Pigou never compared the information
costs involved in government action (e.g., taxes, fines, or
assigning of liability) with the information costs involved in
non-government action (e.g., bargaining) -- yet Coase concludes that
such a comparison needs to be made, in order to find the most
effective means of addressing such situations, in each case.
Fred Foldvary, responding to Mase Gaffney (5/27/99):
This was contra Pigou, who said simply Exxon should pay the social
cost. Not so, said Coase, if it is less costly to avoid the spill.
The point was to take all relevant costs into account. Seems to me
that the relevant cost would be what the locals would pay to have a
clean beach. What Exxon must pay to dump oil is the sum of what they
would pay for a clean beach plus the premium they demand because
theyalready own it
Mason Gaffney, responding to Fred Foldvary (5/27/99):
That's the point, yes. However, don't modify the point by calling
it "psychological." It's a matter of purchasing power: a
wealth effect. This, I think, is what Coasians have papered over, or
minimized, or trivialized - and it's their Achilles' Heel.
Mike O'Mara, responding to Mase Gaffney (5/27/99):
Yet the Coase theorem is that, if transactions costs were
zero, then the outcome would be the same regardless of whether or
not Exxon was liable, and the distribution of wealth would also be
the same (with the only exception being if there was a new right
that had not previously been recognized).
If transaction costs were zero, and Exxon was not liable, so that
the beach owners had to pay to have a clean beach, then they would
have paid less for their land. Or, if Exxon was liable, and had to
pay them, then they would have paid more for their land. As a
result, Coase argues that the distribution of wealth would be the
same regardless of the liability rule.
***
Mike O'Mara wrote (5/27/99):
Coase points out that Pigou never compared the information costs
involved in government action ... with the information costs
involved in non-government action (e.g., bargaining) -- yet Coase
concludes that such a comparison needs to be made, in order to find
the most effective means of addressing such situations, in each
case."
Mase Gaffney responding to Mike O'Mara (5/27/99):
If Coase said that, he was misrepresenting Pigou.
Mike O'Mara wrote (5/27/99):
Yet the Coase theorem is that, if transactions costs were zero,
then the outcome would be the same regardless of whether or not
Exxon was liable, and the distribution of wealth would also be the
same (with the only exception being if there was a new right that
had not previously been recognized).
Mase Gaffney, responding to Mike O'Mara (5/27/99):
Something is being glossed over here. If I begin life owning the
world, and you owning nothing, that in itself changes the
distribution of wealth as compared with equality. Liability is an
incident of non-ownership.
For example, suppose you and a few other people owned all the
land, and the rest of us owned no land at all. But later, suppose it
became generally recognized that Henry George's principles of land
rights were correct, and the law was changed to put those newly
recognized rights into effect.
In that case, Coase would conclude that the distribution of wealth
would be different under different liability conditions,
because a new right was in place that had not been previously
recognized. Coase gave the example of when society recognized a new
right to freedom from slavery -- but his same point would apply if a
new right to land was recognized: in that case only, the
distribution of wealth would be different under different liability
conditions, even if transaction costs were zero.
But in all other cases, Coase concluded that the distribution of
wealth would not be different under liability conditions, if
transaction costs were zero. Or, put another way, in all other
cases, the only reason the distribution of wealth would be different
under different liability conditions is if transaction costs were
significant.
Mike O'Mara, responding to Mase Gaffney (5/27/99):
I mentioned above that Coase said, if transaction costs
were zero, then the distribution of wealth would only be different
under the different liability conditions "if there was a new
right that had not previously been recognized".
For example, suppose you and a few other people owned all the
land, and the rest of us owned no land at all. But later, suppose it
became generally recognized that Henry George's principles of land
rights were correct, and the law was changed to put those newly
recognized rights into effect.
In that case, Coase would conclude that the distribution of wealth
would be different under different liability conditions,
because a new right was in place that had not been previously
recognized. Coase gave the example of when society recognized a new
right to freedom from slavery -- but his same point would apply if a
new right to land was recognized: in that case only, the
distribution of wealth would be different under different liability
conditions, even if transaction costs were zero.
But in all other cases, Coase concluded that the distribution of
wealth would not be different under liability conditions, if
transaction costs were zero. Or, put another way, in all other
cases, the only reason the distribution of wealth would be different
under different liability conditions is if transaction costs were
significant.
Mase Gaffney, responding to Mike O'Mara (5/27/99):
Seems clear to me that if Exxon has to pay me for polluting my
beach, we'll get a lot less pollution there than if I have to pay
Exxon NOT to pollute their beach. Not clear to me how anything above
changes that. Am I missing your point?
***
Mase Gaffney wrote (5/28/99):
"Tradable permit" schemes, derived from Coase,
presuppose government action to create the permits, so I think their
champions are sailing underfalse colors and twisting the issues.
Mike O'Mara, responding to Mase Gaffney (5/29/99):
Coase did not say that there is never any role for government.
Instead, he said that, rather than automatically assuming the
government needs to play a major, detailed role in dealing with any
case of externalities, it's first necessary to compare the relative
information costs of different approaches, such as different
government actions or different non-government approaches (e.g.,
bargaining).
Coase gives numerous examples where the level of pollution is
higher due to the side effects of the high information costs of
certain types of government policies. In some situations, an
approach involving less government involvement in the details (and
therefore with lower infrmation costs) might be more effective than
some other approaches. That is very different from never calling for
any government involvement at all.
So far, I have not read anything by Coase discussing tradeable
permits. But that is a relevant example. Tradeable permits require
only a one-time issuance of permits, instead of continual, detailed
government oversight. So, there might be a lower government
information cost involved than with many other policies. The Coase
theorem is also relevant for setting thelevel of emissions allowed
by an emissions permit, as follows:
If transaction costs were zero, then the level of emissions that
is set would be the same, regardless of whether the pollution source
was held accountable (e.g., taxed, fined, held liable) or not. In
other words, the emissions level would be different with different
policies only because the transaction costs are frequently much
greater than zero.
Mase Gaffney wrote (5/29/99):
So I think their champions are sailing underfalse colors and
twisting the issues, when they paint themselves aslibertarians of
some kind.
Mike O'Mara, responding to Mase Gaffney (5/29/99):
You seem to be using the word "libertarian" as if it
meant "no government", which is not what the word means
(as shown by dictionaries, the Oxford etymology, books by
libertarian economists and philosophers, etc.). I have never seen
any libertarian author or activist ever advocate having no
government at all. There are some radical libertarians who aim for
an eventual goal of a contractual government, meaning a
governmentfunded without taxes, but that is still a government.
And there are some radical libertarians who prefer not to use the
word "government" when referring to contractual
governments: they prefer to use terms such as "arbitration and
defense agencies" -- but these are still really governments.
Most libertarians, and most libertarian economists, are
minarchists, meaning that they favor a government with only a few
basic functions, such as courts, police, and defense. Their only
significant difference from radical libertarians is in the question
of which method to use for funding government (taxes versus
contracts).
Coaseians take the approach that the proper way to determine which
functions need to be taken by government is to look at the economics
involved in alternative methods of achieving a goal, including the
relative information costs.
Mase Gaffney responding to Mike O'Mara
If Coase said that, he was misrepresenting Pigou.
Mike O'Mara responding to Mase Gaffney:
The word "never" above is mine, not Coase's. Coase goes
out of his wayto provide many quotes and citations, including
Pigouvians' own views ofPigou's approach to externalities.
For example, Coase quotes Samuelson's view of Pigou. [Paul
Samuelson]:"..his doctrine holds that....where there are
technological externaleconomies or diseconomies,....there is a
*prima facie* case forintervention" (Samuelson, *Foundations of
Economic Analysis*, p. 208).
That and other citations support Coase's view that "...Pigou's
basic position was that, when defects were found in the working of
the economic system, the way to put things right was through some
form of government action", such as taxes, fines, or assigning
liability. That is very different from a Coaseian view, of comparing
the information costs of various approaches, including different
government and non-government approaches.
Mike O'Mara responding to Mase Gaffney:
Coase pointed out that, if the law does not hold the polluter
liable, then the neighbors would have to pay the polluter to pollute
less (such as Exxon), so they would then have paid less for their
land, since it would be less valuable. Or, if the law did hold Exxon
liable, then the neighbors would have paid more for their land,
because it would then be more valuable.
Either way, the level of pollution and the distribution of wealth
would be the same, if transaction costs are zero (so, the
distribution would be different under different liability conditions
only because transaction costs are often much greater than zero).
Does Coase's conclusion about the effect on land values address
yourpoint?
Mike O'Mara wrote (5/29/99):
Some Coaseian Georgists have suggested an alternative approach to
dealing with emissions: paying annual rent on tradeable emission
permits (where the current holder of the permit would pay an annual
rent for the value of the permit).
Note that the goal is to have the optimal level of emissions. For
some chemicals, the optimal level of emissions might be zero. But
more often, the optimal level of emissions is some amount greater
than zero. For example, each time a person breathes, CO2 is emitted.
The optimal level of CO2 emissions is therefore greater than zero.
But there is also a level above which CO2 emissions in a region
cannot be adequately diluted, dispersed, or absorbed by the
ecosystem.
The question then is to find what is the optimal level of CO2. A
Coaseian approach emphasizes the role of information costs involved
in alternative means of dealing with externalities.
In the case of emissions, a Coaseian Georgist approach (of paying
annual rent on tradeable emissions permits) would seem to have
higher transaction costs than a Coaseian allodialist approach (where
the permit owner would not have to pay rent for the permit). The
transaction costs would be higher under a Coaseian Georgist approach
because each year the permit value would need to be assessed (with
the land assessed separately from the improvements), the permit
revenue collected, the per capita value calculated, and the revenue
distributed.
So, from a Coaseian approach, the higher transaction costs of a
Georgist approach would have to be weighed against the benefits.
This would also apply to the Georgist approach to land rent, or use
of the broadcast spectrum.
Georgists say that the benefits of a Georgist approach include
making land affordable to more people, since the price of land would
go down, due to the land rent payments (any person could then own
land by just paying annual rent, without the obstacle of obtaining
credit or mortgage insurance).
Some Georgists also claim that land would be used more efficiently
than under an allodial system, due to paying land rent for land held
out of use (although some other Georgists are not sure whether that
second effect would be very significant, compared to the bigger
effect from just removing taxes on production, so that production
taxes would no longer be used to subsidize land speculators).
In any case, from a Coaseian approach, the benefits from a
Georgist system would need to be weighed against the higher
transaction costs described above. Since those transaction costs
also include the cost of gathering the information necessary to
properly assess land separate from improvements, the question of
assessments and accuracy is one that Coaseian allodialists see as
involving especially high transaction costs, and possibly
significantly harmful incentive effects if the assessments of land
and improvements do not properly separate the two.
The transaction cost issue is relevant to Robert Nozick's views
on the relative efficiency of Georgist versus allodial policies.
Nozick endorses Locke's proviso for equal access to land value, and
supports compensation to those who are non-landowners. But Nozick
guesses that an allodial system might actually provide equivalent
compensation, if it can be shown that it is more efficient than a
non-allodial system (such as a Georgist system).
But since Nozick does not provide any evidence to back up his
guess, the discussion stops there.
However, Coaseian allodialists, in effect, leave the door open to
further discussion, by implying that the proper way to compare a
Georgist system with an allodial system would be to weigh the
benefits of a Georgist policy against the higher transaction costs
involved in a Georgist system.
In other words, Coaseians imply that the choice between a Georgist
system and an allodial system is entirely one of providing empirical
evidence about transaction costs, effects of accidentally including
improvements in land assessments, and effects of making land more
affordable, and possibly making land use more efficient.
Harry Pollard wrote (5/30/99):
I must confess I don't understand the significanceof Coase, but
then I don't understand the significance of a lot of modern economic
theory. Rent can be defined as the sum of the advantages, less
disadvantages, that attach to a site. Anyway that's the way I regard
it -- not specifically relating it to the margin.
If a beach is at sufficient risk from pollution tobe significant,
the Rent will be less.
If the beach is not at risk the Rent will begreater.
So?
The other issue is the liability of Exxon. The beach is the
private property of the holder -- now,or in the geocracy.
How can "the law" not hold responsible the person or
company who harms another's private property?
On the other hand as said Micawber: "The law is an ass."
Dan Sullivan, responding to Harry Pollard (5/30/99):
As I understand it, if the beach bears the risk, the theory is
that they would pay Exxon to build double-hulled ships, etc., in
order to reduce that risk, which would indeed, reduce the rental
value of the beach(es). If Exxon bears the risk, they would build
the double-hulled ships, etc., on their own, in which case the
rental value of the oil deposits would be lower, since this cost
would attatch to extracting the oil.
The key is that the transaction costs would be much lower
if Exxon were directly responsible for their actions. Otherwise,
every beach community would have to be inquiring about every oil
shipper, negotiating to pay them to engage in various safety
practices, and might even have to hire people to inspect and make
sure the contracts had been upheld. This would obviously bog down
the process enormously. Despite the vagaraties of the court system,
it is still much cheaper, in terms of transaction costs, to make
Exxon directly responsible and sue their assets off than to pay them
not to endanger the beaches.
That seems to be what Coase is driving at, as I understand
O'Mara's understanding of it. Coase would then be arguing that
responsibility should beassigned in a way that will minimize these
transaction costs.
I would suppose, then, that various other behavioral changes would
also emerge as transaction costs. For example, if the beaches were
paying the cost of double-hulling the boats, more such boats would
probably be built, and fewer lifeguards hired. Thus the ripple
effect of these transaction costs are myriad. I can therefore accept
Coase's ideas as conceptually sound but not implementable in a
formulaic or quantifiable way.
***
Mase Gaffney wrote (5/__/99):
Yet the Coase theorem is that, if transactions costs were
zero, then the outcome would be the same regardless of whether or
not Exxon was liable, and the distribution of wealth would also be
the same (with the only exception being if there was a new right
that had not previously been recognized).
***
Dan Sullivan, responding to Mike O'Mara (5/29/99):
In the case of emissions, a Coaseian Georgist appraoch (of paying
annual rent on tradeable emissions permits) would seem to have
higher transaction costs than a Coaseian allodialist approach (where
the permit owner would not have topay rent for the permit). The
transaction costs would be higher under a Coaseian Georgist approach
because each year the permit value would need to be assessed (with
the land assessed separately from the improvements), the permit
revenue collected, the per capita value calculated, and the revenue
distributed.
Mike O'Mara, responding to Dan Sullivan (5/29/99):
I am confused about why the approach need be so complicated, or
why the "land" value of a permit would have to be
separated from the "improvement" value. What improvement
value?
Dan Sullivan responding to Mike O'Mara (5/29/99):
Actually, my point about the transaction costs involved in
assessing land value separately from improvement value was meant to
apply to the case of land area -- I agree with you that it does not
seem to apply to the case of emission permits.
Mike O'Mara, responding to Dan Sullivan (5/29/99):
The only assessing required would be to determine how much
pollution was actually being generated, which would be necessary in
the allodial case as well.
Dan Sullivan, responding to Mike O'Mara (5/29/99):
The rental value of the permit would still have to be assessed on
an annual basis in the case of a Coasean Georgist approach, whereas
in the case of a Coasean allodial approach, it would only have to be
assessed once, at the time the permit was issued (by auction, or
whatever) --after that, there would be allodial ownership of the
permit, and the owner could then sell or rent it to others on the
market.
So, the transaction cost would still be higher for a Coasean
Georgist approach, even for tradeable permits.
And, more importantly, in the case of paying rent for land area,
the transaction costs for a Coasean Georgist approach would be much
higher than for a Coasean allodial approach, because of the cost of
assessing land value separately from improvement value under a
Coasean Georgist system, plus the cost of collecting the land rent
and distributing it.
A Coasean approach would weigh: (a) the economic benefits of
Georgist policy against (b) the higher transaction costs involved in
a Georgist approach (assessing land value separately from
improvement value, collecting the land rent, and distributing the
land rent), plus the costs of any disincentive effect if the
assessments are inaccurate, and accidentally include some
improvement value in the land value assessment.
***
Mase Gaffney wrote (5/29/99):
Seems clear to me that if Exxon has to pay me for polluting my
beach,we'll get a lot less pollution there than if I have to pay
Exxon NOT topollute their beach. Not clear to me how anything above
changes that. Am I missing your point?
Mike O'Mara, responding to Mase Gaffney (5/29/99):
Coase pointed out that, if the law does not hold the polluter
liable, then the neighbors would have to pay the polluter to pollute
less (suchas Exxon), so they would then have paid less for their
land, since itwould be less valuable. Or, if the law did hold Exxon
liable, then theneighbors would have paid more for their land,
because it would then be more valuable.
Either way, the level of pollution and the distribution of wealth
wouldbe the same, if transaction costs are zero
Mase Gaffney:
Does Coase's conclusion about the effect on land values address
yourpoint?
Mike O'Mara, responding to Mase Gaffney:
Actually, in order to address your point more fully, I'll point
out that the Coase theorem seems to refer to comparing different
liability rules, if starting from the same ownership situation --
for example, a starting situation where you own the beach, and we
are comparing the different effects if Exxon is liable versus if
Exxon is not liable.
But the purpose of the Coase theorem does not seem to be for
comparing two different ownership situations, such as comparing one
situation where you start out by owning the beach versus a different
situation where Exxon starts out by owning the beach. Instead, the
point of the Coase theorem is that, in a given ownership situation,
differing liability situations lead to different levels of output
and distribution of wealth only if transaction costs are much
greater than zero.
Also, Coase states explicitly that the Coase theorem does not
apply to the case where new rights are recognized that were not
previously recognized. For example, suppose Exxon started out by
owning the beach, but later society suddenly recognized Georgist
rights regarding access to land value.
The rules of ownership rights would then have changed
unpredictably, so in that case only, Coase would conclude that the
level of pollution and the distribution of wealth would be different
depending on whether Exxon was found liable, even if transaction
costs were zero.
A more interesting case might be where Exxon recently became the
owner of the land, but at the time they bought it, Georgist views
had already become widely discussed among the public. So, if
transaction costs were zero, it would be no problem for Exxon's land
contract to have various contingency clauses written into it, such
as the buyer being excused from much of the deferred land payments
to the seller, if Georgist views were later put into law within a
certain number of years.
So, in that case, even the introduction of Georgist policy would
still cause no difference in the level of pollution or distribution
of wealth, unless transaction costs were much greater than zero.
***
Mike O'Mara wrote (5/29/99):
In the case of emissions, a Coaseian Georgist appraoch (of paying
annual rent on tradeable emissions permits) would seem to have
higher transaction costs than a Coaseian allodialist approach (where
the permit owner would not have to pay rent for the permit). The
transaction costs would be higher under a Coaseian Georgist approach
because each year the permit value would need to be assessed (with
the land assessed separately from the improvements), the permit
revenue collected, the per capita value calculated, and the revenue
distributed.
Dan Sullivan, responding to Mike O'Mara (5/29.99):
I am confused about why the approach need be so complicated, or
why the "land" value of a permit would have to be
separated from the "improvement" value. What improvement
value? As I see it, the community might decide to charge $x per ton
of sulfer dioxide admitted. The charge would be the same for
everyone in the area, unless it could be shown that pollution in
some zones (such as upwind of the population center) was more
destructive than in other zones. No big deal. The only assessing
required would be to determine how much pollution was actually being
generated, which would be necessary in the allodial case as well.
Because pollution is an extraordinary use, it seems that the
community could, by right, charge whatever it cared to charge so
long as it was consistent. As an economic matter, however, it should
endeavor to charge the amount that will return the highest
yeild overall, when combining these charges with rents. A charge
increase that lowers rents by more than the revenue from the
increase is clearly not reflecting the values of the community.
***
Harry Pollard wrote (5/30/99):
I must confess I don't
understand the significance of Coase, but then I don't understand the
significance of a lot of modern economic theory. Rent can be defined
as the sum of the advantages, less disadvantages, that attach to a
site. Anyway that's the way I regard it -- not specifically relating
it to the margin. If a beach is at sufficient risk from pollution to
be significant, the Rent will be less. If the beach is not at risk the
Rent will be greater. So? The other issue is the liability of Exxon.
The beach is the private property of the holder -- now, or in the
geocracy. How can "the law" not hold responsible the person
or company who harms another's private property? On the other hand as
said Micawber: "The law is an ass."
Dan Sullivan, respondings to Harry Pollard (5/30/99):
As I
understand it, if the beach bears the risk, the theory is that they
would pay Exxon to build double-hulled ships, etc., in order to reduce
that risk, which would indeed, reduce the rental value of the
beach(es). If Exxon bears the risk, they would build the double-hulled
ships, etc., on their own, in which case the rental value of the oil
deposits would be lower, since this cost would attatch to extracting
the oil. The key is that the
transaction costs would be much lower if Exxon were directly
responsible for their actions. Otherwise, every beach community would
have to be inquiring about every oil shipper, negotiating to pay them
to engage in various safety practices, and might even have to hire
people to inspect and make sure the contracts had been upheld. This
would obviously bog down the process enormously. Despite the
vagaraties of the court system, it is still much cheaper, in terms of
transaction costs, to make Exxon directly responsible and sue their
assets off than to pay them not to endanger the beaches. That seems to
be what Coase is driving at, as I understand O'Mara's understanding of
it. Coase would then be arguing that responsibility should be assigned
in a way that will minimize these transaction costs. I would suppose,
then, that various other behavioral changes would also emerge as
transaction costs. For example, if the beaches were paying the cost of
double-hulling the boats, more such boats would probably be built, and
fewer lifeguards hired. Thus the ripple effect of these transaction
costs are myriad. I can therefore accept Coase's ideas as conceptually
sound but not implementable in a formulaic or quantifiable way.
***
Mase Gaffney (5/31/99):
Here's a simple way to grasp Coase.
In the 1960's idyll (before VN screwed things up) the idea was gaining
ground of going after polluters, Polluters took alarm. They needed a
diversion. Enter Coase, with soothing syrup.
Fred Foldvary, responding to Mase Gaffney (5/31/99):
On the
timing, Coase had already entered in 1960 with his article "TheProblem
of Social Cost".
Mase Gaffney (5/31/99):
He says, it doesn't matter to whom
you give these rights, it will all work out the same, due to the magic
of the market.
Fred Foldvary, responding to Mase Gaffney (5/31/99):
He said
IF transaction costs were zero, and what does not differ is the
efficient price to be paid to either compensate for or avoid the
pollution, but that the distribution of the benefits is NOT the same
and DOES depend on the property rights.The main point of the Coase
theorem is that the initial allocation of legal entitlements does not
affect the
effeciency of the result. The equity or justice of the result
is of course affected. Hence, the Coase theorem in no way warrants the
grandfathering (and, to be genderically correct, the grandmothering)
(grandparanting?) of the polluters with the tradable permits. I don't
know what Coase thinks about tradable pollution permits. But
economists generally recognize that the Coase theorem by itself does
not warrant such permits. See for example Robert Cooter's entry on the
"Coase Theorem" in the New Palgrave Dictionary of Economics
(available at most libraries). Cooter states that the social cost of a
polluter obtaining a coupon exceeds his private costs, so polluters
will acquire too many of them. This creates a divergence between
private and social costs, an externaltiy, contrary to the Coase
theorem. So the attempt to eliminate externalities by setting up an
artificial market for pollution permits just gives rise to a new type
of externality. See also Cooter, January 1982,"The cost of Coase",
Journal of Legal Studies. Another problem with Coase is that
even if transaction costs are low, there are strategic elements in
bargaining, i.e. game behavior, in splitting up the surplus. So in the
real world, negotiations don't necessarily come to an efficient
conclusion, but can result in a union strike or failure to come to an
agreement. See Regan, October 1972, "The problem of social cost
revisited", Journal of Law and Economics. Like a
frictionless physics model, the zero-transactions model is a logical
construct with restrictive, unrealistic assumptions, but which
illuminates certain economic principles. To apply it to the real
world, we then need to put the friction back in and relax the
assumptions. And then adjust for equity or justice. The real
implication of the Coase theorem is that it is good to reduce
transaction costs. But whoa there! Taxes on transactions are a major
transaction cost! To reduce transaction costs, taxes on income, sales,
and capital goods must be eliminated. The rent tax minimizes
tax-transaction costs. Coase is really George friendly, taken at its
word.
Mase Gaffney:
Coase went along with the game, which
catapulted him to fame and Nobel-ity.
Fred Foldvary, responding to Mase Gaffney (5/31/99):
Do you
have a reference we can look up re "went along"?
***
Harry Pollard wrote (5/31/99):
How can "the law" not hold responsible the person or
company who harms another's private property?
Mase Gaffney, responding to Harry Pollard (5/31/99):
The issue often arises over common property, e.g. beaches on the
Pacific Coast, or air, or waters. The trick for environmentalists
(who are Georgists when they uphold common rights) has been to
establish that the proper valuation of these is what the polluter
would have to pay the public to buy them (or a pollution easement
over them); not what the public would have to pay the polluter NOT
to dirty them, or the power company not to dam them, etc.
Harry Pollard wrote (5/31/99):
On the other hand as said Micawber: "The law
is an ass."
Mase Gaffney, responding to Harry Pollard (5/31/99):
It was Mr. Bumble, and he said "If the law presumes that
(that a man controls his wife), then the law is a ass." Note
the conditional nature of the statement, and the bad grammar (he was
an Englishman, after all). Even the law has learned something from
Mr. Bumble in the last 150 years.
***
........, responding to Dan Sullivan (5/30/99):
Thanks, Dan, I'm still in the dark and have been since I first
heard of Coase and his theorem.
Mase Gaffney, responding to Dan Sullivan (5/31/99):
Here's a simple way to grasp Coase. In the 1960's idyll (before VN
screwed things up) the idea was gaining ground of going after
polluters, big time. (LBJ was going to make the Potomac swimmable
and drinkableagain, remember?) Economists criticized "command
and control" regulatory thinking and policy, and proposed
instead to tax effluents, on the"Polluter Pays" principle.
Charge the polluter according to damages inflicted, then let him
decide how best to abate the offense by modifying his processes,
and/or his products. They cited some old 1928 proposals by a bloody
Pom, A.C. Pigou of Oxford, to give the whole idea some proper
British cachet and understatement. Pigou, BTW, also wrote favorably
of taxing LV, (with even more understatement). LBJ and his guru,
Charlie Schultze, were bemused and supportive. Those were the days,
my friend, we thought they'd never end, ...
Polluters took alarm. They needed a diversion. So they cooked up
and marketed a rival proposal, also invoking the prestige of the
market mechanism. This was to create private properties in
pollution, which might then be traded. The original properties were
given to existing polluters, in proportion to their histories of
pollution.
Most Georgists, alas, were asleep at the switch and let all this
happen without having a clue. Others, however -- common sense
Georgists, let us say, who never heard of George -- objected to
giving away these newly created titles to a form of property: call
them "pollution easements."
Enter Coase, with soothing syrup. He says, it doesn't matter to
whom you give these rights, it will all work out the same, due to
the magic of the market. In those days, you only had to say "market"
and 90% of Georgists would wake up and salute. Coase went along with
the game, which catapulted him to fame and Nobel-ity.
At this point Gaffney screamed "OK: If entitlements don't
matter, give them all to me!" But who ever listens to a nut
like him. "Wait!" he cried: if you'll pay people not to
pollute, I will promise not to emit 500k tons of SO-2 per day, and
I'll charge only half of what Edison wants." Again, stony
silence, they never returned my call, if you can believe it.
And so it came to pass that a new public domain was stolen, just
like the old one, while we played in our sandpiles. Thank you,
Ronald Coase!
Harry Pollard wrote (5/__/99):
I can see possibilities in other areas, but the beach is not a
good example -- unless someone can put me right.
If the beach belongs to me, Exxon may nor use it to dump oil. If
they do, they will pay. They will pay the costs of removal, punitive
damages for the carelessness that harmed me, and an addition sum for
the whiplash I suffered from the double-take when I first saw the
sludge.
I don't care about their double-hulled boats, the need to inspect
their operation, or the changes in their Rents.
I will have compensation from them -- and I don't care about the
transaction costs.
But, perhaps the beach example isn't the best.
