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Archive for January 26th, 2011

Pigouvian Taxes, Are they the best way?

Pigouvian Taxes, created by economists Arthur Pigou, are essentially taxes on institutions (people, companies, etc) who produce negative externalities. They are are designed to create a disincentive for the polluters, producers of the negative externality, etc.  They seem effective but Friedman (who I figured out has signed my copy of the book) seems to suggest their is another way. Using Ronald Coase’s theorem seems to be the answer. Instead of just charging a tax to the producer of an externality, where positive or negative, Coase hopes another party can buy it. The example in Laws Order of the bees and a farmer illustrated this well. My question of the day is the following: Are people really so self-interested that they don’t care how their negative externalities effect the world, everyone else? Its a mildly loaded question but I have been feeling that economics take no account for emotion, rhetoric, and values (as in personal, not what we want to buy) and simply look at how the world “should” work. Regardless, Coase’s ideas are very intriguing and are beneficial when the can be applied.

What is the purpose of Friedman’s chapter this time around?

As I noticed, its to show the complexities of decision making involving property and the rights associated with property. The spaghetti diagram demonstrates this well. He also responds to the situation of sparks flying from passing trains on to a farmer’s field and starting a fire on the wheat crop growing there. His fixes are that the farmers can grow another crop, the trains can place spark arrestors or someone just has to absorb the cost of the impending fires if neither of the previous options are taken seriously. He even discusses the public good and hold out problems and some possible solutions. But why didn’t he explain the solution at the beginning of the chapter.

“Farmers could reduce the problem by leaving the land near the railroad track bare…”

I guess it was to leave us with some room to see how this could easily fit into the equation and discuss whether or not is an efficient solution or not. Besides it would make the spaghetti diagram a bit more messy.

I believe that it would be the most efficient in all of the scenarios. How far from a train can a spark fly? I have no idea, but I’m just going to say a generous 20 feet. If the farmers just don’t plant the 20 feet next to the track then no harm done. They will be out money though. The railroads can then rent that section of land for a fraction of the price that it costs to have the farmers pay for new crops or for a totally burned field. The farmers don’t have to pay for a field and or spark arrestors.

Government power

The principle of “public use” takings seems to be a very slippery slope that allows cities planners to exploit who they will. I really thought that the author summarized the seemingly unlimited potential power of government when he wrote, “Any ingenious government agency can always manufacture some conceivable indirect benefit from any transfer of property from A to B.” In other words, what private corporation can’t be argued to be a benefit to society?

Epstein wrote, “So the best approach here is to accept the constitutional tradeoff that allows the taking only when the loss in subjective value is small and the locational necessities are great.” I agree with this statement but I also realize its vast limitations. Everything is relative. Who determines if the “locational necessities” are great? Who can determine the “subjective value” when the word itself means an individual opinion?

The solution involves empathetic politicians who can make unbiased judgments and obtain sufficient information to make the best decision. However, once again we run into subjective values along with a misalignment of incentives.

I advocate a much stricter and limited standard to use the taking clause. However, government will not easily relinquish the power that they have obtained by these court cases. Judges, like most everybody else, are self interested. They have a tendency to side with those officials that have appointed them to their positions.

Change is needed; by I don’t know how to define the optimal result or the exact means of achieving it.

Wishful Thinking

Courts are composed of humans. We also live in a world of imperfect information. Therefore, completely just outcomes will rarely be reached. However, perhaps if all judges, lawyers, and relevant parties created spaghetti diagrams, the world’s ills would be solved. As unappetizing as I find spaghetti, in any form, Friedman’s diagram does clarify the issues involved in the different decisions and can be helpful when determining whether property rules, liability rules, or fines will be of most use in settling a particular case. That being said, I found most of Chapter 5 to be rather boring. This surprised me because thus far I have loved Friedman. I’ll stick to blaming the spaghetti.

I’d now like to mention the biggest beef I have with public use, and more specifically, zoning laws. If such rules were uniformly enforced, as annoying as they may be, at least they would be applied equally to everyone. I’m sure that in some cases zoning laws are equally enforced, but in small towns like the one I grew up in, it was too tempting for city council members to target individuals through strict enforcement or no enforcement of zoning. This really bothers me, and the fact that zoning laws can change ex post facto, if you will, is even worse. I think a good way of ensuring at least some increased protection of property rights would be to ensure that the zoning laws in place when the property was purchased would be maintained, so that you could buy land without worrying that the city would step in and change the rules as soon as you wanted to build something. Of course, this is impractical, because some properties were purchased decades ago and we can’t expect development to stand still. But it was a nice thought for a minute…

In class the other day we talked about how the Providence City Council wanted, and eventually was able, to buy some property for the “public good.” On it was to be built a public road for a new housing development. I kept getting caught on the question of why not just build the road in another area or around the edge of the property? What really got me was the fact that it split the man’s property in two. Who really wants to cross the road for their own property? Depending on the size of the property, it could get annoying. Maybe I have a hard time imagining this situation because I’ve never lived on a lot bigger than 13,500 square feet. It probably does not hurt the fact that I grew up in a city of 100,000 in Southern California. I guess it is just that I’ve have not been in an area, much of my life, that had numerous large lots. In the cities along Interstate 5 in Southern California, you are lucky to get a backyard if it was built within the last fifteen years. The house takes most of the lot and the resident is left with about a foot before the fence marks the boarder of their property. Builders must have figured out that home buyers wanted more house, and since both husband and wife were working long hours or wanted more leisure time, who wanted to be strapped with yard work? I could not imagine living on a lot that is an acre. There are very few residential lots that even approach a half-acre (21,780 ft2). It seems so massive. I vacillate between a position of – if the lot is so big you can put a road through it, why worry – and the other part of me that says my land is my land, build your road around it.

Takings Clause

As I read the various stories of the abuses of the takings clause throughout history, I found myself pondering the original intent of the authors of the constitution. Did they really and truly intend for government to abuse it’s citizens and their rights to property? I thought the whole reason behind the Revolutionary War was to escape the tyranny and injustice of King George. Instead, it would appear that we have created Kings of Court, who feel they can take what they deem necessary, despite the cost. I find the reasoning behind justification behind the takings very flawed, as was pointed out by Epstein in the Midkiff v HHA case.

I know that we discussed in class that many of these property rights are just made up, but even then it is hard to see how justice and be served by taking away these rights. Whatever the excuses, be they hold-outs or economic development, I can see no just compensation in the taking of lands. Which leads me again to point I made in my last point, compensation is always seen as a monetary value. While money is good, and essentially makes the world go ’round, if someone was to take my land, I would expect much more than money. First, I would require the judge or city official who allowed this to let me live with him in his house until I found a suitable replacement. Second, I would require complete and fulltime access to whatever was going onto my previous lands, so that I could come and go as I pleased. Finally, I would require a parade for me once a year ( because I like parades). This all seems like a just compensation to me. Perhaps if this was what necessary to meet this requirement, we might have seen some of these cases go the other way… @_@

Looking at the past through the lens of property rights…

My whole life I’ve been taught to share. Share your pudding. Share you toys. Share with all the Good girls and boys. In the midst of this teaching was the inherent idea of property rights. I shared my pudding because it was MY pudding. I had the right to consume that food. I had the right to share it. These were taught to me at such a young age that I assumed that they were always there, I never thought to ask where they came from, or who enforced it.

Who gave me the right to my Toys? Or the right to consume my pudding? Was it my parents when they gave me my toys? Who gave them them the rights? The same question can be asked about property rights or rights in general, where did they come from? How did they begin?

From my minute understanding of the past I know that the idea property rights are old. Very old. In fact one of the first references that I’m aware of a law of property could be found in the first books of the bible. When Moses declares God’s law of an eye for an eye and a tooth for a tooth, he’s in affect declaring not only the right to property (my eye and tooth) but also just compensation for a lost of that property.

While the idea of property and compensation has been around for a while, as pointed out by the biblical reference, people have seemed to fall short on the idea of ‘just’ compensation for centuries.  When we look at the biblical law of property (eye for an eye) we can see how much this would fall short of ‘just’ compensation. While the offending party would have to pay for the property (my eye) that was destroyed ( with their own eye) the compensation did little to help restore the full value of what was lost. Indeed it might have resulted in a net loss for everyone involved. The property owner lost not only the value of the property but also the future value that the property might bring. In this respect the biblical law of property in this narrow example comes woefully short of having achieved proper compensation.

(While this biblical law admittedly acted more as a deterring factor to the destruction of property is also was a crude and vague way to asses liability in an early society.)

Gratefully we’ve learned from the past and as the text points out we’ve got the possibility of efficient outcomes if a proper amount of information is available to either the property owners or the court system which would allow for an efficient outcome to be selected and I would suspect that the passage of time would help us as societies come to more and more efficient solutions.

A Farm or a Road?

Epstein makes his feelings very clear in his book. Indeed all of the topics included are defended with a vengeance. His newest victim is the idea of “Public Use.” Although he does not come out directly and say it, I would not be surprised to hear him say that all governmental seizure of property for its own use is not acceptable. The only time he does admit is necessary is to transfer ownership from one private owner to another. Surprisingly I would have to say that I agree. Perhaps this is because the idea of the government taking property for its own use hits home, or more accurately to my grandparent’s farm. My Grandparents used to have a small farm out in the western edge of the Salt Lake Valley. In reality it was about 106th south and Redwood road, so not really that far out there, but at the time it was in the sticks. As the city began to grow the need for larger roads became more necessary, and my grandparent’s farm was right where the road needed to be built. Now, do I see the necessity for a larger road? Yes! Does that make the thought of their property being deemed a public good and taken from them any easier to handle? No! Do I think the government treated my grandparents unfairly? No. In fact they lived quite comfortably in their small condo supported mainly by the compensation they received. My grandfather used to say that he was glad he didn’t have the farm to worry about anymore. I don’t think he ever really blamed the government for what happened. Later on he sort of viewed it as a blessing in disguise. Yet I know that my mother and father have wondered out loud what they could have gotten for that piece of property if it wasn’t a slab of concrete that cars drive over. I am grateful that the road over my grandparents property is a four lane divided highway because it would be hell otherwise.

I guess what I have learned most from Epstein and my own reasoning is that there are times when someone’s private benefits are conflicting with the public good, and the government needs that power to condemn and take ownership, provided they compensate the owner. But that sort of argument and interpretation of the law must be viewed as limited and strictly as possible.

Just buy the spark arrester

                I really like how Friedman explains his thoughts and backs them up with examples or scenarios.  Sometimes he does go a little over board were it seems like he is repeating himself, but were Friedman talks about liability rules versus fines there are a few things that I don’t agree with.   One reason is Friedman says that if a railroad throws a spark up and catches a farmer’s field on fire, if that farmer is compensated for the loss, the farmer has no incentive to switching to clover has oppose to if the railroad is fine and the money goes to the state, then they have the incentive to switch to clover.  First of all I think the farmer should be compensated for their loss and the railroad should have to supply the spark arrester or have some kind of regulation.  Another is if the farmer field did burn, I do believe that would give the farmer the incentive to change his crop or the incentive to approach the railroad and work out a deal on spark arrester.  I do agree with the examples Friedman gave about transaction costs being low it can be good but make fines worst.  It’s a double incentive for railroads, they put on the spark arrester, that takes care of the fine and they can get the farmers to pay for them.  Everybody wins in this case, right?  I think that the railroad should pay for the spark arrester, I understand it’s an externality and it’s the farmer responsibility  to take care of it.  It seems to me it would be in the railroad best interest to just have the spark arrester cause if the farmer doesn’t pay for them isn’t the railroad still liable for the damages.  So the railroad would be losing more money in the end.  I’m not sure with this case, I just might have it backwards but it just seems fair to me that the railroad should pay for the spark arrester and the farmer be compensated for the damages by the railroad.

Dealing with the Court

Friedman’s discussion in Chapter 5 brings up an excellent point about the court system, especially when determining compensation. I agree with Friedman in that we can’t expect the courts to be omniscient. However, he makes the assertion that a smart court will provide compensation to cover the cost of the damage done, and nothing else. Referring to his example of the train shooting sparks, the “smartness” of the court could greatly be called into question. Then again, the “smartness” of the railroad could also be questioned in the same situation.

For example, the cost of putting a spark arrester costs $1000 and the damage done to a farmer’s wheat field averages out to $400. If the case goes to court, a smart, efficient court would award the farmer $400 in damages. Now here is where I see this example falling apart. Friedman argues that since the damages to the farmer cost less than the spark arrester, the railroad wouldn’t install the attachment. However, if the railroad has to deal with three court cases, all resulting in $400 paid to the farmer ($1200), it would make more sense for the railroad to simply install a spark arrester. And we cannot deny the power that the courts have in terms of influencing policy. If the courts see that they’re getting a lot of cases dealing with sparks caused by the railroad, then it would be reasonable to say that justices may begin awarding larger sums of money to the farmers in order to sort of push the railroad toward installing the spark arrester. It may not be the most efficient choice, but eventually the railroad would be economically inclined to install the arrester and avoid the courtroom altogether. Members of society usually believe that the courts are supposed to solve the problem at hand, and this would indeed solve the problem.