I was terribly unclear about my disagreement with the Coase Theorem. I think I need to write a longer piece about where my disagreement comes from. Gabriel and EclectEcon give the standard intepretation of the Coase Theorem. EclectEcon writes:
The problem is, that (in my view) these issues are dealt with ex-post - specifically, Mr. Evil Lawn Guy gets his pesticides on Mr. Tomato Farmers crop, then they have to come to some sort of agreement about damages (if any) and come up with some agreement about restitution for past misdeeds and some future agreement covering future pesticide spills. Or more realistically, Mr. Tomato Farmer has to decide whether or not to send a Cease and Desist letter to Mr. Evil Lawn Guy and hire some expensive lawyers to take the matter to court. Or to just suck it up.
So your basic choices are as follows:
In your example, if the organic tomato farmer values the right to be pesticide free more than the evil lawn guy values a nice lawn, then the tomato farmer will not sell that right to the lawn guy if it is initially given to the farmer.One of the difficulties with the Coase theorem here is that it assumes that the discussion of the externality is ex-ante rather than ex-post. It assumes that the "evil lawn guy" will first ask Mr. Tomato Farmer: "Pardon me, but I would like to spill pesticides on your property. What's your price for allowing me to do so?"
You want to argue about who SHOULD have the property right? that has nothing to do with efficiency IF property rights are well-defined (and easily enforced) and if transaction costs are low.
The problem is, that (in my view) these issues are dealt with ex-post - specifically, Mr. Evil Lawn Guy gets his pesticides on Mr. Tomato Farmers crop, then they have to come to some sort of agreement about damages (if any) and come up with some agreement about restitution for past misdeeds and some future agreement covering future pesticide spills. Or more realistically, Mr. Tomato Farmer has to decide whether or not to send a Cease and Desist letter to Mr. Evil Lawn Guy and hire some expensive lawyers to take the matter to court. Or to just suck it up.
So your basic choices are as follows:
- Get Mr. Evil Lawn guy to stop via lawyers and the courts, which is likely to be expensive (which goes to EclectEcon's discussion of "easily enforced". OR
- Pay off Mr. Evil Lawn guy not to do it again. Which may be efficient from a Coasian point of view, but which is appaling in its normative message, in my opinion.
Comments
In your case, you’d get an ex-ante offer because it’s in the interest of the polluter to get cash, if there’s more cash to be had from the deal rather than from the pollution.
In other words, polluters don’t just “get away with it”, as you make it, but rather they wouldn’t want to “get away with it” if there was more money in not doing it.
I think the problem is this… there are certain circumstances in which asking for money is not done. For various reasons, and we can hand wave all we want.
You don’t ask people for money not to do some things. You just don’t. Even if it would be mutually advantageous to swap cold, hard cash.
This aversion to cash in particular circumstance is what I think your examples gets at.
Get Mr. Evil Lawn guy to stop via lawyers and the courts, which is likely to be expensive (which goes to EclectEcon’s discussion of “easily enforced”.
I dunno, how likely is it that Mr. Evil Lawn guy would get hit with punitive damages and/or forced to reimburse Mr. Tomato Farmer’s legal fees?
I think your “hire some expensive lawyers” is clearly an exaggeration here as well. Small claims court should be able to handle this case without any lawyers at all, and if you really want a lawyer surely one cheap one will suffice. So assigning the property rights to Mr. Tomato Farmer should work, in most cases.
As for assigning the property rights to Mr. Evil Lawn Guy, well, if that were the case it would be the responsibility of Mr. Tomato Farmer to ask Mr. Evil Lawn Guy “Pardon me, but I’m going to plant some organic tomato plants here, and I’d like you to refrain from using pesticides on your lawn. What’s your price for refraining from doing so?” And then, if Mr. Evil Lawn Guy made the deal and then broke it, we’d be right back in the same situation as if Mr. Tomato Farmer initially had the property rights and Mr. Evil Lawn Guy violated them.
I’m not so sure the ex-ante or ex-post really matters. What matters is how property rights are defined: does the tomato farmer have the right to no damages on his land, or not? If he does, then whether the issue comes up before or after the pollution begins is irrelevant; the pesticide guy has to pay the farmer.
You point out that there are large transaction costs in getting this resolved: the organic farmer has to take it to court. Of course transaction costs are large and the Coase theorem doesn’t say that externalities will be resolved even in the case of well-defined property rights.
Incidentally, I think the importance of perfect information in an efficient Coase theorem outcome is important, too. The two parties have to have a good idea of what the externality is really costing them — considering that many externalities impose long-term costs (global warming), coming up with good estimates of these costs is effectively impossible.
I always thought that the lesson from the Coase theorem was not that there are cases in which externality problems can be solved non-cooperatively, but rather to show how stringent the minimum requirements are for this to be the case. It does seem rather obvious that if the problem is sufficiently “well-behaved”, the market can solve the problem. What Coase shows, I thought, is that we need both well-defined property rights and no transactions costs for this to be efficient. So, aside from the obvious transactions costs, in the example of the lawn pesticides, we would for instance also need property rights to be defined over seapage between adjoining plots. It seems very hard to find real examples where even the first criteria is likely to hold (at least concerning pollution, one of the most classic applications).
What if I maintain a nice lawn and have been doing so for years (using pesticides and other methods) but a new neighbor who just moved in started growing apples. This new evil apple grower now demands me to stop using pesticide on my lawn which I think will hurt my beautiful lawn.
what do you say now?