Wednesday, January 20, 2010

What is the Coase Theorem, really?

Tim Haab (OSU) has a nice lecture on Coase.

32 comments:

Katie said...

Professor Haab’s “Wealth Effects” version of Coase Theorem indicates that the bargaining outcome produced undesirable results if the polluter has the property rights (because this increases the polluter’s demand to pollute). Based on this, I’d say that one of the (many) goals of environmental policy (and/or public policy generally) should be to stop bargaining, or curb the nature of bargaining because of its potentially negative influence on the environment if the polluter has the property rights. But this doesn’t seem ethically feasible (balanced)…

Roberta said...

I agree with Katie. The economic theories sometimes don`t touch the environmental in the same way as the market. Even more, I`m not sure about the Coase Theorem effectiveness. I always think if a correct government intervention can`t guide a fair market decision.

Michael said...

The Coase Theorem looks much more valid after having read Professor Haab's version. Like many economic theories, it looks great in the theoretical form, but as Professor Haab mentions, can we really just say that transaction costs can be dismissed? I do not think this is true. It goes along the same lines as my comments in class regarding the irrational behavior of the human race. No matter what level there is, there is always an opportunity cost associated with having to negotiate something. This opportunity cost would often not be able to be quantified in order to add it to the cost of the negotiation. Time is a basic opportunity cost and there could often be court costs, arbitration costs, etc. to make this theorem not work in the real world. The idea, however, should continue to be used in coordination with other policy-based theories in order to make something that will actually work.

Caroline said...

This blog definitely cleared up the exact meaning and limits of the Coase Theorem for me, because in class it was more difficult for me to understand how it would actually work and function. It also reinforced my belief that the Coase theorem seems to be extremely idealistic and very hard to apply to a real society. Besides the fact that you have to wish away transaction costs, the fact that people could have other incentives by selling away their property rights to clean air, for example, shows that another element besides self-betterment would have to exist for it to work. If someone owned the property rights to air and could sell away their rights for a profit, in order to prevent them from doing this they would have to care about the quality of the air. They would have to care about the future opportunity cost that air pollution will have on society more than the present opportunity cost of not accepting the money.

Victor said...

Coase Theore, at a first look, seems just one more economic theorem which, according my standpoint, is completly based on hipotecal situations that, probably, will never happen, at least by a way that my eyes might see. But the main issue here is: Does the Coase Theorem make sense? Can a real situation be solved according this theorem? And if yes, which Coase Theorem approach is more correct to a real situation?
Well, many question at first. According my background and think that Coase Theorem is a little limitated to really explain a real situation. Perhaps it would be correct if the market was quite closed with few firms in that. In this case would make sense think that this limitated number of firms could deal one with each other aiming a ideal solution, even with no transation costs, featuring a free-market version. But anyway, when you think at the market itself, with a huge number of firms and realize how complex is the relation amoung all of then for me it is obvious that this version, as well as the fair market version, is not correct enough to explain how this firms deal externalities issues. Perhaps the more completly version of Coase Theorem would be The Free Entry version due to the fact that considers the relationship beyond a close market and also considers a subject that is usually present at environmental discussions, that is the wealth provided by the possibility of deal with your proprety rights. The environmental issues usually rellated to this is the issue about Carbon Credits.
So, although I don't believe so much in any version I think that last one is which sounds better though I don't have idea what Coase really wanted to say with this theorem.

oldman4president said...

It's important to consider the transaction costs of bargaining and the enforcement costs of a tax or regulation when determining the desirability of a particular method of correcting an externality.

The point about wealth effects, how who has the property right (and thus increased wealth) affects the value placed on pollution abatement, is interesting, though I'm a bit confused how the polluter values the pollution more with greater wealth.

While in most examples of pollution affecting large numbers of people would make bargaining very difficult to emerge naturally, with small-scale externalities with only a couple or few affected parties, it probably occurs quite frequently. For example, if one side of a small lake was owned by a farmer and the other side by a fisherman, and the farmer used fertilizer for his crops than polluted the lake, reducing the fish catch of the fisherman, the externality cost is completely on the fisherman as the only other user of the lake. The fisherman can then offer to pay the farmer to reduce the fertilizer runoff to achieve an efficient allocation. Entry is limited because there are only two properties touching the lake.

boehlinga10 said...

Professor Haab's lecture definitely helped in understanding the several facets of Coase's Theorem. The Wealth Effects Version was especially interesting to me. It seems backwards and inefficient to give the polluters property rights to pollution if that will actually increase the demand for emissions. Therefore, as Haab stated, it is crucial to allocate the initial property rights in manner that will address the issue at hand and decrease the demand for emissions rather than increase it.

James said...

Haab's article gave a nice summary of the Coase Theorem and the different ways to approach it. His comment below the article about the OSU airport expansion is very intriguing and represents many property dilemmas we have today. In my opinion, transaction costs are too large to ignore. Today,firms face consulting fees, lawyer fees, time etc in bargaining so that must be taken into consideration. Overall, I think Haab did a good job presenting the theorem but I am still a skeptic.

Andrew said...

I agree with James (and others) about the problems of assuming away transaction costs. As we talked about in class, with these transaction costs a market for the externalities cannot form. I also realize that in economics we tend (always) to assume away certain things that screw up our models...

Either way, I think Haab did well to attempt to present the different versions of the Coase Theorem, and find it interesting that one theorem can be interpreted in many different ways.

Hillary said...

I agree that Professor Haab’s explanation clears up confusion concerning the Coase Theorem. But, shouldn’t Coase have clearly defined his theorem? I really don’t understand why, if Coarse knew there was debate and much confusion concerning his theorem, he didn’t plainly state what exactly it was he meant. If he knew there was enough confusion (leading to multiple versions of the Coase theorem ) that he had to come out with an additional piece in 1988 “debunking” the simple versions, shouldn’t he have eliminated all doubt the second time?

Jarrett Smith said...

The article does a great job of explaining the Coase Theorem and how it can be applied unviersally to solve environmental issues with a market system. After reading the article it is clear the theorem does work, so long as all the hindrances to an efficient market can be accounted for.

Unfortunately, there are just a lot of different ways the market formed can create inefficient outcomes. The lecture mentions issues with property rights, free entry, and wealth effects. Off the top of my head I could add imperfect information to that list. All of these factors can lean the market towards either too much or too little pollution.

As was said earlier, the lecture reveals the importance of decision makers to be careful and prudent in assigning property rights, setting taxes, etc. in order to move towards a desired outcome. It is somewhat of a daunting task but adjustments can be made as things move along to get closer to market efficiency.

Elsa said...

I think this article of the Coase Theorem is very helpful because it clearly explains the basic concept that a market will not work, specifically bargaining, if the property is not defined. I think it is important to note that until property is clearly defined and assigned to a party, the market will to be able to function, and a price for bargaining will not work.

Joseph said...

This article clearly presents the complications of transaction costs associated with the Coase Theorem. It seems to point out that however one looks at policy focusing on environmental issues, there will always be assumptions and things that complicate the process of moving toward alternative energy sources, and that maybe a healthy mix of command & control, and economic incentives have to be used.

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Tara said...

Professor Haab's lecture further clarified the Coarse Theorem and presented it in a more neutral way than the textbook did. I also agree with the previous comments that mention the virtual impossibility of assuming away transaction costs. In theory the Coarse Theorem makes sense, however, it is completely impractical and although the lecture clarified the theorem's main points, it further shows how ineffective the theorem actually is. Environmental issues are complex and the Coarse theorem does not account for these complexities.

Stevenson said...

I would have to agree with Katie as well. The article was clear in its presentation of the importance of bargaining and property rights towards achieving an efficient levels of pollution. However, I also believe that the use of this bargaining, if property rights are assigned to the polluters, entails other interests for polluters such as favorable public policy that could create a skewed allocation.

Allie Long said...

I agree that Professor Haab does a really good job at clearing up the Coase Theorem, which was confusing at first. While the theory is interesting, I don't think it is really realistic. There are so many factors that can contribute to an inefficient market that this theorem can't control for them all. It does make some interesting points though and is valid to a certain extent. I think he does a good job explaining the importance of transaction costs.

Allie Long said...
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Allie Long said...
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Blair said...

While this article helped clear up some of the confusion I initially had about the Coase Theorem, I am still skeptical of it's effectiveness. In a culture where property rights are so closely tied to individual liberties, it seems unrealistic that bargaining would be done fairly. To me, it seems like the Coase Theorem would work best in a community where everyone knows each other and cares more about the community's overall health than making profits or property rights. When the polluter may never meet the victim or when the polluter may never realize the actual extent of direct or indirect consequences for the victim, it seems like the bargaining would not truly be fair. But today, a community like that may be more idealistic than the Coase Theorem.

Rosemary said...

Haab highlights some important oversights that exist in many people’s understanding of the Coase Theorem. One is that the party which is granted property rights may utilize those rights for profit, whether the parties be polluter and victim in the Haab article or farmer and rancher as in the class example. It follows then that a free market might not accomplish the original goal of fixing whatever problem that the market was established to remedy. Theoretically, the market may even exacerbate the issue. Haab offers the caveat that this wealth effect exists in other forms of solutions to environmental problems also so one mustn’t discount the Coase Theorem on the outset. However, the it might only be useful in certain situations due to the conditions that must be met in order for it to work.

mancinia11 said...

Professor Haab, in clarifying the Coase Theorem through many different interpretations, only highlights the fact that while the theory is good on paper, it is virtually impossible to apply to real life. There are too many unknowns that the simplest version, and even more complex versions, assume away. All of the issues Professor Haab brings up in his article (transaction costs, wealth effects, etc.) need to be taken into consideration. It is true that the Coase Theorem moves the argument away from the correct amount of pollution, to what the correct issues/unknowns/assumtions are(again, transaction costs, etc.), which Professor Haab argues is the "beauty" of the theorem, but it is virtually impossible to correctly predict these issues, meaning that the Coase Theorem would almost never produce the efficient solution.

Joe said...

Professor Haab’s helps to clarify the Coarse Theorem and state the four versions. I agree with Elsa when she said that property rights must be decided for a market to work. Once these rights are decided, Professor Haab does a good job of explaining the potential for a snowball effect (pollution begets more pollution) to occur through the wealth effect.

Stephanie Beebe said...

Professor Haab argues that a fundamental flaw of the Coase Theorem is that property rights are not always concretely defined; he provides the example of the polluter and the victim, both of whom believe their right to the property is justified and true. Another flaw he describes is the discrepancy between transaction costs depending on the initial owner of property rights. I believe Haab's version of these two aspects of the Coase Theorem demonstrate why it is so hard for us to establish effective environmental policy.

Jeremy said...

Haab's lecture on the Coase theorem made a lot of sense. The simple metaphor of the rancher and the farmer left too many topics untouched and Haab's lecture did a good job of clearing them up. However, the Coase theorem cannot help pollution in due to how expansive it has become. Air pollution easily crosses state lines, water pollution flows through multiple states. The government just needs to force a slow and steady transition to cleaner production, but unfortunately politicians love to get in the way.

Taylor said...

Haab did a good job explaining this theorem in detail, but if anything I am now more skeptical of the Coase Theorem. The theorem relies on a situation to exist in which there are no transaction costs, the property rights are straightforward and have been correctly granted to a certain party from the beginning, and that there will be no new entry due to increased demand for polluters or victims - I find it difficult to imagine a real life situation in which all these criteria would be met. I think Coase is interesting, but not very practical.

Pearson Nibley said...

The lecture was certainly thought-provoking because it covered multiple facets and possible scenarios of the Coase Theorem. Haab seems to leave the door open for a discussion about ethics, where no matter which side receives the property rights, each side has an opportunity to benefit economically rather than attempting to decrease pollution for the right reasons. Perhaps Haab is suggesting that Coase felt it was difficult to precisely define his theorem because of the possibility for multiple scenarios and the fact that it is so hard to predict the behavior of polluting firms and the victims of these firms.

Thanh Van (NTV) said...

The wealth effect and the potential free entry for increased numbers of suppliers and demanders are very interesting. On a theoretical standpoint, Professor Haab is correct to raise such concerns, but only when we treat "clean air" or any of the ecological services as a normal goods. Even though clean air is desirable, I suspect that the rise in income will equate to the increase in demand for clean air, especially since wealth doesn't increase our needs for clean air. Also, Prof. Haab's point about more victims would move to polluted areas to reap the benefits of payment on "clean air", but once again I suspect the magnitude of change in consumption behavior of "clean air".

Aparajita said...

Professor Haab does a wonderful job of summarizing various versions of the Coase Theorem. As we had discussed in class, often the assumptions of a theory are ignored and people on focus on the outcomes predicted by the theorem. As Haab's shows Coases's theorem is a good example of it. Assumptions like Transaction cost, perfect information, few participants have to hold true for the Coase theorem to work.

Katie Bean said...

Professor Haab’s article clarifies aspects of the Coase Theorem, especially about property rights and their allocation, and transaction costs that before seemed confusing and sometimes almost contradictory. Due to nonexistent/conflicting property rights, transaction costs, and imperfect information, the Coase Theorem does not appear to be practically applicable. Because it is unlikely that transaction costs will ever be low because of the large number of polluters and the even greater number of those affected by the pollution, a market will not automatically develop for the externality. However, the premise of a market for externalities should be considered and applied. It will not come about by itself, but government policies can create such a market, such as Cap and Trade policies for Carbon emissions.

Ben said...

Haab's lecture certainly helped clarify the different aspects of the Coase Theorem, but I remain skeptical of how well it addresses environmental degradation. A price is placed on environmental damages and a market is created, yet it seems to do little to change these harmful practices. In order to have a large positive impact on the environment, prices would have to include the value of ecological systems and services impacted by pollution, and such a price would be tremendously high and very hard to calculate. The theorem is dependent on how people value wealth, environmental quality, etc. Again, if demand for environmental quality is low, there will be negligible amounts of pollution removed.