Coase Colored Glasses


Archive for January 17th, 2011


Why do we see pick pocketing as a negative? For those that can make a living off of taking money from another shouldn’t we allow them to? As Mr Friedman so eloquently explains the costs to the pick pocketer to himself and his victim we see that he is may come out on top. The criminal may only have a cost in training, materials, etc. He may find a $50 dollar bill and a gift certificate to sportsmans warehouse in his that fancy wallet of yours which has a value of its own. The criminal will come out pretty handsomely when he has exercised some elbow grease and put for a decent days work.

But what of his cost on society? He spends all that time and effort to train, he has to purchase his tools of the trade. He doesn’t create new wealth though. He doesn’t provide a good or service for another. He is just taking from you. You will now have to work Christmas Day and possible miss your little sisters birthday to make up for his career decision. You absorb the cost. When he gets caught, taxes will be payed to place him in jail, and see that he has a fair trial.

This is a very black and white demonstration of someone that is costing society. How about a professional athlete or someone of the arts? Do the create new wealth, are they truely providing a service? Some I don’t think are, or at least not to the extent to which they get paid. How do we fix this?

Why care about Coase?

In a world with perfect information and zero transaction costs Coase theorem will lead to an efficient out come as two parties seek to eliminate the externalities that come after any choice. That’s wonderful! The invisible hand of the market system has once again led to efficient outcomes with out the need for government regulation. Wait, whats that you say? We don’t live in a world of perfect information? Transaction costs are almost certainly never zero? The Government intervenes all the time?

How is this possible? Well the simple reality is that we don’t live in a world that conforms well to any type of theories we might have. That doesn’t discount the economic insights that Coase had about social cost. In fact the very reality that we live in an ever changing world requires us to find a constant, or a norm, by which we can help understand what would happen in a certain situation and thereby allow us to understand how we got to our current reality.

A simple example might explain my point. As noted in the text a polluter and a land owner might come to an agreement that would be efficient for both parties. For instance the polluter might pay the land owner to pollute his land, or the land owner could pay the polluter to stop polluting. However with out the benefits of perfect information and zero transaction cost this might not take place. We then can take what should have happened (Coase Theorem) and what actually happened and see where the efficiency in the market broke down. It might that transaction costs where to high or information was asymmetrical. One way or another it gives us a starting point so that we can compare what happened with what should have happened.

Bright Line Rules

I like to spend my time thinking of cool ways to carry out insane policies that in reality would make things a lot better if they could actually be carried out.  If it were possible I would love to allow judges to have a sort of sliding scale in which to judge people.  The world is full  bright line rules.  For example, children under 17 cannot go to rated-R movies.  The idea has the same reasoning behind why a presidential candidate must be at least 35 years old.  Children under 17 just aren’t mature enough to handle the subsequent violence, sex, and language that goes with a rated-R movie.  But I know several people who are technically old enough to see these types of movies yet I know for sure they just aren’t ready for it.  Why do I know this?  Because I live with them.  I have seen a 22 year old man panic at the site of blood, or the slightly erotic kiss.  What do propose?  That all children take an I.Q. test at the beginning of each school year.  Rather than assigning ages to movie ratings, assign I.Q. scores.  All the Children who have high enough scores can come in and see the show.  That would eliminate the desire to sneak in to R-rated movies to be cool and could lead to added studying.  Economic efficiency for all.

Another bright line rule is the fact that guys are not allowed into the girls locker rooms and vice-versa.  What about homosexuals?  A homosexual male in the men’s locker room would cause much more uncomfortable feelings than if Jessica Alba walked in.  Perhaps what we need to do is assign locker rooms based on sexual preferences.  Those that like men dress together and those that like women dress in another.  Presto, awkwardness avoided!

Alright its a work in progress but still you get the idea.

Eminent domain right or wrong?

         I’m new to this economic talk and don’t know much about it.  I’m in the Natural Resource field.  Which has a lot to do with private and public property, certainly for the west.  I do agree with eminent domain and compensations to a certain extent.  Now in the case of Lucas v. South Carolina Coastal Council, I assumed Lucas was just a rich guy trying to have a fancy house on the beach front and the state was really trying to protect the public or doing what they thought was in the public best interest.  Even so what about aesthetic value, maybe this plot had a much higher value than just getting compensated for it.  For example what if the state was wanting to build a new highway, and let’s say it goes through Farmer Johns land.  Which has been in his family forever and he has spent his whole life there and it is his career.  How can you be compensated for that.  To me this is where eminent domain doesn’t work.  His aesthetic value for this land is priceless.  I understand that this new highway would benefit the public has a whole and Farmer John is one guy but it just seems to me that you should have more say in the land that you own.   

How is the Coase Theorem useful?

My thoughts on the Coase Theorem are similar to those expressed by “oboboy14.” I don’t believethere is ever a transaction in which the costs can be zero, because with every action or transaction, there is an associated opportunity cost, no matter how small that cost may be. I also find the idea of achieving perfect information to be ridiculous, because when dealing with flesh and blood, I consider everything to be variable. Yet Stearns and Zywicki assert the theorem’s “significance in evaluating institutions” (19). I have not done very much of this week’s readings, so I don’t know what explanations I may run into later, but when the Coase Theorem seems so far from reality, I’m left wondering how it can be very useful in real-world applications. Is the theorem mostly used in normative economics, or is there some essential piece to understanding the theorem that I am missing? I hope we can talk about the Theorem lots tomorrow!

I find it frustrating to see the government seize private property, especially when they are not willing to properly compensate the owner. Usually, the government seizes property in a case of eminent domain, and the case of benefitting the many will only outweigh the rights of a few in certain instances, such as building new roads or widening established roads. The government must feel confident in finding a loophole to avoid paying market value because the laws do not clearly establish criteria for compensation. For instance, in Lucas v. South Carolina Coastal Council, South Carolina thought they would be able to prohibit building on undeveloped property without proper compensation. It was not until Lucas fought the case that he was compensated enough to pay off his mortgage by order of the U.S. Supreme Court. The ironic thing is that for the state to afford paying off Lucas, they sold it at market value by promising the buyer they would be able to build on it. There are places on the central California coast where you cannot build on your own property – it is a building moratorium. The property is real cheap right now because it may be 100 years before anyone would be allowed to build. What happened to the restrictions to help promote tourism that caused Lucas to lose his investment? I guess the cost started to out weigh the benefits for the state.

Externalities and new thoughts

I am truly new to thinking like an economist.  I spend much of my time reading out of books for political science classes and thinking in the ways that my professors have trained me.  While I was reading in Law’s Order, it had me thinking about things that I seriously had never considered.  Friedman mentions the term a pecucaniary externality which, means no net cost, since the effecgts on other people cancel out.  He says on page 33 that “it occurs when an action by A results ina transfer from B to C.  The logic of the situation is rather differenct when an action by A results in a transfer from B to A.  In friedman’s example about a man selling his house at the same time that his neighbor is selling his house at and it causing the neighbor to lower the selling price I really had never thought about the ways that our decisions affect so many other people.  That may sound super selfish or maybe I am just young and haven’t experienced life much but considering that if I were to sell my house at the same time as my neighbor, causing him to lower the price of his original price by a sum, which in turn causes the buyer to save that same amount of money thus having a zero sum net, I really hadn’t even thought about it.  Everything that we do affects other people down the road.  There is no asking yourself theoretically what would you do if you could do whatever you want and there would be no external affects you have to always do the best you can to consider all options and their affects on people, sometimes it may mean that people experience negative externalities like polution, like in the case of Friedman’s steel mill, but like he said, no matter how efficient he can make his smoke stacks he is still spending money to benefit people down wind at no gain to him.  From an economists point of view (which I am still very much new to) it seems like the extra money that you would spend in trying to do that would be pointless.  It might keep the people happy but is it efficient?

My thoughts are kind of every where.  I am finding the material super interesting though and I am looking forward to being able to eventually be able to better articulate my thoughts in my blogs.

Is there any reality to the Coase Theorem?

I had to read Stearns and Zwicky’s explanation of the Coase Theorem a few times to understand what it was, and from what I had gathered it really does not seem that realistic or applicable to me.  In theory the example of the factory and the laundry made sense, but how often in Economic theory do things actually work out?  On page 19 of the text, 3rd full paragraph down, it states “…two preconditions that render liability rules irrelevant to efficient allocation of resources: zero transactions costs and perfect information.”  The next few sentences the authors go on to explain why ‘zero transactions costs’ are purely idealistic, but for me the idea behind ‘perfect information’ was quite strange.  Is there every really any perfect information?  How can one possible put values and costs to all the operations of a factory, the externalities (such as pollution) and provide an accurate estimate of it all.  Human behavior and emotions sway information too much to provide any one industry with accurate, let alone perfect information.  I do find the Coase theorem very interesting, but I just can not begin to imagine that it has any real-world application.  Most countries can not provide an accurate count of the number of citizens, how many have and do not have health-insurance, and I would argue that most businesses and industries can not forecast properly, nor do they have the correct tools to do so.  In my microeconomics course I learned a lot about supply, demand, and pricing strategies.  And when all was said and done, my professor told me that many companies fiddle with the prices and settle on one that maximizes profits.  It is a very interesting theory that we can learn from and apply principles and ideas from the theory to areas in economics, but does not have any ground in the real world.

Regulation: The Price to Free Markets?

I, like many others in this great nation, do believe that free enterprise is the driver of our economy. The “invisible hand” that guides the acts of trade; manipulates supplies vs. demands and the prices associated with that product or service is in my mind the best way for economic growth in any society. But it is just a shame that the idea of an absolute free market would only prosper the way it was intended to do so in Plato’s perfect city. Not only is it the negative externalities that prevent markets to run freely, but also in my opinion people’s greed that forces a greater hand into the picture. Without greed or lack of liability there would be no need for any regulation in a free market system. Regulation was put into place over time when finding someone or some organization doing something illegally to gain an advantage/profit because they knew they could. To many times this is looked at solely to the big wigs of companies and the fat cats on Wall Street, but it doesn’t stop there, not even close. I for one don’t like the idea of paying taxes anymore than the next person, with also enjoying the feeling of getting something for a great deal or even free. How many times have you done a job for somebody for cash and the thought of taxes never crossed your mind? How many times did you have a friend that would fix your car or over look a busted brake light so you would pass inspection? How many times have you said those infamous words in today’s society, “hey man, can I download this CD onto my computer?” There are thousands of these “little” transactions committed everyday, but are overlooked for the insignificance of the monetary value involved, but added together is a monstrous number. Of course the people fudging the numbers on Wall Street or giving out trade details behind closed doors aren’t helping. But could the lack of all the “insignificant” actions stop a recession? Is the market ever a free market?

A Coase of Action

Once again the theories of economics have caused me to question the intelligence, rationality, and my overall faith in humanity. As Friedman expounded up the theories of Pigou, Coase, and other economist, I couldn’t help but think about their assumptions of human nature and the reality of the world we live in today. Many of the examples used by Friedman were examples or cases that have been played out multiple times, yet not always with the same out come. And despite their assumptions that the system or players within would find the most efficient outcome, this too has proven to vary from case to case. I found myself agreeing with Coase particularly in his views that inefficiencies in the system do not automatically warrant a government intervention. And in fact, no government intervention will be as efficient as the free market correcting it self.

Law and Economics creates a fine line that is easy to cross and blur. Jury and legislatures are not always all-knowing, and their personal views can often times influence what they view as the most efficient outcome. This may cause the outcome to not be fully efficient. Which brings me to another question that I found myself pondering while reading, and hopefully someone will be able to answer it for me. Why is efficiency the outcome? Are economist so cold that human feelings or morals are not the most important thing? Why this drive to achieve maximum outcome at what may be the cost of the environment, or even lives?