Ronald Coase is a British economist who joined the University of Chicago in 1964. He is best known for the "Coase theorem," which claims that assigning clear property rights will allow the market to reduce pollution. In the deregulation drive of the 80s, conservative politicians and lobbyists used the Coase theorem as theoretical justification for their policies. And in 1991, Coase won the Nobel prize in economics partly for this idea.
However, the Coase theorem has taken a severe drubbing in the academic literature. The failure to convince most economists has clearly frustrated Coase, as when he wrote:
This essay in particular will make three points. First, it is not the magical panacea to pollution that many on the far right claim it is. Second, even if the theorem were valid, the preconditions required to make it work are so daunting that it can be applied only in an extremely limited number of cases. Third, the theorem itself suffers theoretical problems that may well render it invalid.
The Coase Theorem
Coase's argument begins by addressing a well-known problem of markets: externalities, otherwise known as the Spillover Effect. This occurs when someone other than the buyer must share the benefits or costs of a product. The classic example is pollution. Factories can either treat pollution -- which costs money -- or dump it into the air or water for free. If they choose to dump, they may save their customers some money, but citizens who live near the factory will also pay a price in higher death and disease rates, less fertile land, environmental catastrophes, etc. Sometimes the spillover effect is both positive and negative. An airport obviously benefits its customers, but it also subjects the local neighborhood to various externalities. Positive ones include increased local business; negative ones include noise pollution.
Externalities pose a significant problem for those who wish to argue that markets are magical, especially when those markets are free. Pollution is not the only negative externality -- others include unsafe auto accidents, workplace injuries, product hazards such as lead paint, etc. But pollution probably has the longest and most tragic tradition. Particulate air pollution alone kills 64,000 people in the U.S. each year. (2) Dioxins are estimated to kill another 26,000 to 260,000. (3) And this isn't even counting the environmental devastation and loss of life caused by water contamination, radiation, acid rain, global warming, ozone depletion, etc. The final U.S. mortality rate may reach the hundreds of thousands each year. And this is only the fatalities -- nonfatal environmental diseases are even worse. So unless someone can prove that the market can solve its own externalities, public regulation remains the best way of stopping this destruction.
Traditionally, economists have recommended two public approaches to solving pollution. The first is "polluter pays." Under this system, polluters are responsible for cleaning up their pollution. A major selling point of "polluter pays" is its relative efficiency. Scientists need to conduct only a few studies to determine, say, how much mercury can be tolerated in the bloodstream before becoming a health hazard, and thus what level of environmental mercury is acceptable. Government then establishes these levels as society-wide norms, and needs only to inspect a random sampling of businesses to encourage compliance. If polluters exceed these norms, they must pay the cleanup costs. This might raise the price of their products, but it "internalizes" the externality, by passing the full cost of the product on to the consumer. This may raise the prices of many products, shift supply and demand, and perhaps even bankrupt some companies while creating new ones. But the results will be more economically and environmentally efficient. Under this system, businesses have a market incentive to develop manufacturing techniques that reduce pollution. It may seem ironic, but "polluter pays" is the best way to unleash market forces in the fight against pollution.
The other approach is the "Pigouvian tax," named after Arthur Pigou, the British economist who suggested them. Under this system, the government taxes a company for each unit of pollution that it emits. Companies therefore have an incentive to reduce pollution as much as possible. Presumably the extra cost gets passed on to the consumer, and the government uses the funds to fight pollution. But this is much less efficient and direct than "polluter pays."
One of the keenest goals of the far right is to find a way to let the market solve externalities without government involvement. Coase attempted to meet this challenge by devising what is popularly known as the Coase theorem. The definition below may seem like gibberish at first, but a plain-English translation will follow:
The difficulty of applying the Coase theorem lies in meeting the
many premises contained in its first part. So, to begin with,
let's just review the core aspects of the theorem:
Property rights: According to Coase, many disputes over resources stem from the fact that no one owns them. Or -- nearly as bad -- everyone owns them, as in the case of public property. However, these disputes could be resolved if the unclaimed resources were divided up as private property. Now if someone wants to use your property, you could charge them a fee. Or if they abuse your property, you can sue them in court. Assigning property rights greatly enhances the ability to resolve disputes over the use and abuse of resources.
A useful concept to keep in mind is that property rights are actually a bundle of many different rights. For example, you have a right to prevent airplanes from flying ten feet above your property, but you do not have a right to prevent them from flying four miles overhead. Likewise, you may have a right to prevent a factory next door from choking your air with carbon dioxide. But humans also exhale carbon dioxide as a natural by-product of their metabolism. Thus, we cannot establish a single, monolithic "property right" that prevents people from affecting your property in any way, shape or form. In defining property rights, we must identify the bundle of rights most appropriate for the owner. This is important because Coase argues that we should be able to sell individual "sticks" from this "bundle" -- for example, selling a factory the right to pollute your air.
Efficient and identical use of resources: Suppose that well-defined property rights exist. The rest of the Coase theorem works like this. Suppose that a chemical factory is dumping pollution into a lake. But there is a group of fisherman on the lake who earn their living by catching fish, and the pollution greatly reduces their yearly catch. Let's suppose the pollution reduces the fishermen's profits by $10,000 a year. Let's further suppose that pollution-cleaning equipment costs the factory $5,000 a year.
There are two ways that property rights can be assigned to the lake. They can be given to the fishermen, or they can be given to the factory. Let's see what happens in each case:
So, interestingly enough, the pollution-cleaning equipment gets
purchased either way, and the fishermen fish in a clean lake.
As hypothetical analysis, this is indeed clever -- what one unknown economist has characterized as "a bit of dry wit." But now lets look at another possibility. What happens if the fishermen lose only $2,000 a year from a polluted lake, instead of $10,000? Again, there are two scenarios:
So the Coase theorem doesn't completely eliminate pollution even
in principle. Defenders of the Coase theorem point out that complete
elimination is probably impossible anyway -- the theorem merely
shows how pollution can be reduced to an optimal level.
But here is where the whole foundation of the Coase theorem starts cracking. Sharp readers will have probably noticed several shortcomings in the Coase theorem already -- indeed, there are so many flaws and potential failures that to count them all is impossible. As an analytical curiosity, the theorem is interesting for its own sake. But as a policy proposal, it's dead in the water.
The flaws of the Coase theorem
Most debates over the Coase theorem turn on the question of whether it can be applied to cases in the real world. Mainstream economists have produced a wealth of examples where it does not; Coasian economists (hereafter referred to as "Coasians") have struggled to explain how the theorem could be made to work at least some of the time.
Let's start by reviewing the many important cases where it doesn't even apply. Most economists will probably agree that the Coase theorem was never intended for these cases. But it is important to establish its limitations nonetheless, because many conservative pundits see the Coase theorem as a sprinkling of academic holy water on the political claim that unregulated markets are the most environmentally friendly. So, with apologies to economists, here are a few of the many instances where the Coase theorem fails:
If the resource in question cannot be divided or demarcated
into private property. Air is the classic example -- it is
impossible to divide our atmosphere into private property. Air
thus fails to meet the most important premise of the Coase theorem,
and nothing would stop the world's industries and transportation
from polluting it further. We will review a Coasian attempt to
get around this, but needless to say, air remains a perfect example
of a public good best regulated by a public institution.
If the resources within a property are mobile. One example is groundwater, or the continental water basins, which move water under countless properties. Another is fish in the oceans. Even if the oceans could be partitioned for the use of thousands of different fishing companies, a problem remains in that fish would not respect these boundaries. Unfortunately, fish migrate thousands of miles through the oceans, and there would be nothing stopping companies from over-fishing their respective lots. In fact, without group agreement and government enforcement of that agreement, they would have every incentive to do so. About the only other way that fishing companies could prevent violations of fishing agreements is to establish a private monopoly of the seas -- which is even worse.
If property rights are irrelevant to the environmental problem. The population explosion is a good example. Scientists attribute most of our environmental problems to the world's burgeoning population, which places ever greater demands on the environment's limited resources. The cause of the population explosion is science and technology, which have resolved many problems of scarcity and increased the "carrying capacity" of the land. Strengthening property rights would hardly affect this trend.
If the polluter is not the neighbor, but the owner. Virtually every acre in the U.S. is already owned by someone, but this has not stopped owners from ruining the land. Farmers still pollute with pesticides and cause top-soil erosion and salt-poisoning through over-irrigation. Developers still destroy natural habitats by creating yet more urban and suburban sprawl. Timber companies still plunder their great landholdings without sustainable reforesting programs. In fact, in South America, rain forests are cleared to make way for other profitable activities, like farming and grazing. These situations arise because the profits received from spoiling the land are highly individualized and short-term, but the costs of spoiling them are socialized and long-term. Social institutions like government are therefore much better suited to prevent this type of destruction.
It is interesting to note that the Coase theorem should work even with one party. In our first example, suppose that the factory also owned the fishing fleet. If pollution or other inefficiencies occurred, it would still have a financial incentive to come to a "self-agreement" as outlined by the Coase theorem. The fact that owners still environmentally degrade their own land is thus an indication of how poorly the Coase theorem can be expected to work even under the best of circumstances.
The point here is not just that "internalities" can
be as environmentally damaging as "externalities." In
the final scheme of things, pollution does not obey imaginary
lines. Air and water pollution obviously travel, but even land
pollution spreads as rain dissolves it into the soil and carries
it beyond one's property. Even if the damage could somehow be
strictly confined to one's property, it would still have far-ranging
effects on the ecosystem, given its interconnectivity. Perhaps
the most obvious example is the destruction of breeding grounds
for endangered species. Ultimately, the entire concept of "internalities"
and "externalities" is an economic one, not an environmental
The above examples show that the Coase theorem cannot be applied as an anti-pollution policy in many critical cases. To claim that we can solve the world's environmental problems simply by assigning strong property rights alone is therefore naïve. But to be fair, most Coasians make more sophisticated arguments attempting to show how the theorem might be applied.
For example, let's revisit the problem of dividing air into private property. Suppose that you live downwind from a factory that is pouring sulfur dioxide into the air. You may not own the air, but a legal authority (either a judge or a legislature) could grant you the right to be free from its pollution. This right would go into your bundle of property rights, and you could either use it to force the factory to stop polluting, or sell that right to the factory for a fair price. The other possibility is that the right to pollute would be given to the factory, and it would be up to you to tolerate it or pay for the solution. Either way, this approach will allow the Coase theorem to work its magic and find the most efficient outcome.
That problem "solved," Coasians then attempt to identify the premises required to make the theorem work. These include:
Transaction costs are the costs of negotiating and agreement. If there are numerous parties involved, or bitter legal disputes with teams of legal eagles, then the costs of coming to an agreement may exceed its benefits. And the expense involved in bringing many parties to an agreement is not the only transaction cost. There are search and information costs in finding the parties involved and informing them of exchange opportunities. There are also enclosure costs, such as fencing the property. There are monitoring and policing costs, to ensure that agreements are kept. And there are prosecution costs for trespassers and violators. If these costs exceed the benefits, then the agreement will not happen.
In the case of pollution, this is an insurmountable problem. It is impossible for millions of commuters and residents in Los Angeles to reach a unanimous agreement on controlling smog.
Let's look at another example. Suppose a factory is given the right to pollute the air. You are probably not the only person downwind of the factory -- there are probably thousands of other residents as well. Somehow you would all have to get together and agree to a solution to the problem. And there are many possible solutions: the group could tolerate the pollution, or buy pollution-cleaning equipment for the factory, or move out of the area, or sell the neighborhood to a toxic waste dump that could pollute it anyway. But thousands of people are not going to agree on a single solution. The only way to reach a decision is through some sort of democratic agreement, which is the essence of government, and what Coasians are trying to avoid. Even if the group could agree to a plan of action, a "free rider" problem emerges. Namely, no one is forced to pay for the solution. Any single individual could withhold his contribution, hoping that everyone else will chip in and he will benefit from their solution anyway. Payment will therefore be problematic.
But what if the other scenario occurs: what if the residents are given the right to enjoy clean air? If 999 residents agree to accept damages from the factory, but one insists on his right to clean air, then the factory has no choice: it must clean up its pollution. This result is probably inevitable, and it is the "polluter pays" principle that Coasians are trying to avoid. There is also a second problem: it gives individuals an incentive to hold out -- that is, threaten to exercise their right to clean air -- in the hope of extorting higher damages from the factory. So, to make the theorem work, Coasians argue, residents should not be given the right to clean air, only the right to collect damages if the air is polluted.
Unfortunately, the same transaction-cost problem emerges, now only in reverse. There are thousands of pollution sources all around you, ranging from fixed factories to moving vehicles, and the weather blows their pollution around chaotically. Furthermore, different pollutants, when combined, become synergistic. So who is actually harming you? Who should pay, and by how much? This is the stuff of legal battles. We need look no further than the insurance industry and tobacco companies to see how even open-and-shut scientific cases can be disputed in court for decades.
Nor is this a morally sound policy. Imagine someone telling you that you don't have the right to keep your arm -- only the right to collect damages if someone chops it off. (And this is not mere hyperbole -- many Coasians seem to forget that pollution kills.) You would have little recourse if a rich corporation found it profitable to do so. As a possible solution, the factory could pay damages not in the form of money, but moving people out of the pollution area. But most people live near factories because they work in them, and at any rate, it would be foolish to try to separate all industry and neighborhoods in a huge city like Los Angeles. The extra commuting time and pollution alone would represent yet another externality borne by the resident, in an arrangement that was supposed to hold the factory liable.
We should also note another irony: the original appeal of the Coase theorem was that it didn't matter who got the original property right. If the wrong party did, it could be sold to the right party. But if the theorem only works by identifying the right party in the first place, and then only by qualifying their property rights, then the advantages of the theorem are nil. These are essentially the same actions that governments take when they limit pollution.
Coase blames the failure of his theorem to work in the real world on these transaction costs, not on the market or the theorem itself. The theorem itself is sound, he claims -- if a million people could somehow bargain costlessly, they would always come to the most efficient agreement. But Coase admits that a world of zero transaction costs is "a very unrealistic assumption." (4) He further concedes: "Once transaction costs are taken into account, many of these measures will not be undertaken because making the contractual arrangements would cost more than the gain they make possible." (5)
So, how can transaction costs be reduced? Ultimately, Coase admits they can't. But a recurring theme in his writings is that governments are usually in no position to do better, and scholars should investigate situations more closely to learn where market solutions might be more effective. Of course, their findings could inform government policy as well as the market's.
Wealth and income effects
Transaction costs are not the only obstacle to applying the Coase theorem. Another is wealth and income effects. This is defined as the change of wealth or income that occurs when you are awarded property or property rights.
Why is this significant? Because a different assignment of property rights changes society's overall supply and demand. Let's return to our factory-and-fishermen example. Who buys the pollution-cleaning equipment depends on who is given the rights to the lake. If the factory has to buy the equipment, then the price of their widgets goes up. If the fishermen have to buy it, then the price of fish goes up. These differences will reverberate through the entire economy. There is also a second type of income effect: most people desire a higher price for selling a right than buying a right. Suppose someone is dumping garbage in your yard. The odds are high that you would charge them much more to continue dumping than you would pay them to stop it. So the income that either party makes from this relationship will differ, depending on who gets the property right.
Coase was aware of the threat this posed to his theorem, and he gamely asserted that the results would be identical nonetheless. If the factory buys the land knowing that fishermen own the lake, it also knows that it will have to compensate the fishermen, and this will correspondingly reduce the value and purchasing price of the factory's land. Thus, Coase argued, there should be no overall wealth effects.
The rebuttal to this argument is that no one can predict the future use and production of land at its moment of purchase, so it is impossible that the sales price could reflect future changes. Coase brushes this objection aside with the incredible remark that "apart from such cataclysmic events as the abolition of slavery, these effects will normally be so insignificant that they can safely be neglected." (6) One only needs to imagine a landowner switching his business from a child-care center to a steel factory to see the poverty of this argument. And at any rate, such cataclysmic events are common. There are innumerable examples where discoveries changed the values and usage of the land: the discovery of toxicity from lead paint and gasoline additives, leakage of underground fuel storage tanks, eutrophication problems from fertilizer runoff, salinity buildup from irrigation, erosion from cropping methods, flooding from channelization, etc. All these are externalities.
Many economists consider income effects to be an outright refutation of the "invariance claim" (the claim that outcomes will be identical either way). But wealth and income effects are ubiquitous, and they would invalidate the Coase theorem entirely. A few Coasians therefore have attempted to put a new twist on the theorem. They argue that the results may not be identical, but they will be equally efficient. That is, both the fishermen and the factory will come to a more efficient agreement -- regardless of who must buy the equipment and raise their prices. The problem with this new claim is that such changes in supply and demand have rippling effects throughout the entire economy. If the fisherman have to buy the equipment , then they must compensate by raising their prices or cutting their expenses, which only passes on the externality to unrelated parties. Compare this to the "polluter pays" system, where externalities are internalized completely, efficiently, and fairly.
This may seem unclear, or, worse, controversial, so let's take a closer look at this example. Suppose that if the factory gets to pollute the lake, it makes $50,000 a year profit. Conversely, if the fishermen get to fish in a clean lake, they also make $50,000 a year profit. Obviously, they cannot do both at the same time. If the fishermen get the rights to the lake, the factory will make only $45,000 a year (after buying the pollution-cleaning equipment). If the factory gets the rights, the fisherman make only $45,000 a year. The improved efficiency of the Coase theorem derives from the fact that either of the parties would have made only $40,000 without buying the equipment (the fisherman by absorbing the loss, the factory by compensating them for their losses). Now, suppose the factory gets the rights to the lake, and the fisherman see their profits reduced by $5,000. How can they respond to it? There are only three ways: reducing their operating expenses, cutting their salaries, or raising their prices. No matter which option they choose, a large number of innocent and unrelated parties will pay the costs for factory products they are not necessarily using. So the externality has not really been internalized, and the Coase theorem has resolved nothing.
But what if it's the factory that's absorbing the $5,000 loss? Then we have a weak form of "polluter pays." The factory will compensate the damaged parties until the damage becomes too great, after which it will pay to clean up its pollution. The costs will ultimately get passed on to its customers, and the externality will be internalized. (There are numerous problems with this approach, since it carries all the other shortcomings of the Coase theorem.)
Now, if you're a legal authority considering whether to assign
rights to the factory or the fishermen, your dilemma is to decide
whether the fishermen's community or the factory's community should
absorb the cleanup costs. Coasians say it doesn't matter, because
either decision is "equally efficient." But if that's
so, then it should be the polluter who pays, for that is the only
real way to internalize the externality.
Perfect competition and information
Another precondition of the Coase theorem is perfect competition. This means that the market features a large number of competitors, homogeneous goods, free entry and exit, and perfect information. This results in a high degree of efficiency: namely, lower prices and higher quality of goods. When competition falls, then monopolies or oligopolies rise. These institutions are notorious for raising their prices, lowering the quality of their goods, exploiting customers, and otherwise engaging in inefficient behavior.
There are many reasons why perfect competition is essential to the Coase theorem. Without it, the incentive of firms to become even more efficient will not be as great. Also, perfect information is required if firms are to be aware of bargaining possibilities with others. This includes knowing the financial state of one's competitors and bargainers. Without such knowledge, externalities will persist, unrecognized and unresolved.
It is also important that parties do not come to the bargaining table with differences in bargaining power. An extreme example of this was the white man's settlement of the American West. When Native Americans attempted to use the land as common property, gold miners who had staked it as private property appealed to the U.S. Cavalry to force a better "agreement."
In modern times, lawyers, not guns, constitute bargaining power. A giant corporation with its team of legal eagles, researchers, encyclopedic information and business and political connections will be able to win the better deal from an average Joe with no resources. Coasians also tend to ignore one of the most basic of bargaining tools: the threat. Inefficient agreements could very well result when one party has an advantage over another -- hence the value of perfect competition.
Likewise, inefficient agreements could result from parties with different technological capabilities. In bargaining for oceanic rights, the U.S. has the technology to mine deep seabeds, whereas Argentina does not. Thus the payoffs for each party are different, and it is not certain that an agreement will bring an efficient result.
Of course, perfect competition is one of those ideal conditions that exist only in the minds of economists. But it also raises a paradox. If too many parties are bargaining, then the transaction costs will prevent any agreement. But with few parties, how can there be perfect competition?
Coase attempts to get around this by claiming that zero transaction costs are a proxy for perfect competition. That is, a monopoly with zero transaction costs will behave like a perfect competitor, since it will seek to maximize its efficiency and profits. Most economists, including Nobelist Paul Samuelson, find the idea of "competitive" or "efficient monopolies" hard to swallow. But even granting Coase his point, a world of zero transaction costs is only slightly less imaginary than perfect competition.
Coase and the real world
It is revealing that when Coasians argue their points, they always use hypothetical examples. The real world is replete with true tales of bargaining, but they do not make their way into Coasian literature. When Coase attempted to defend his ideas in his 1988 book The Firm, The Market and the Law, he stuck to his favorite hypothetical example of ranchers and farmers, showing how the market could resolve the externality of cows eating crops under any assignment of property rights. Completely absent from his example was any discussion of large numbers, transaction costs, wealth differences, imperfect competition, and the other real-world problems.
On the other hand, Coase's critics do have empirical evidence that the theorem is wrong. At the heart of the theorem lies the "invariance proposition." This is the assertion that no matter who is given the property rights, the outcomes will be identical. Fortunately, major league baseball gives us a rare opportunity to confirm the validity of the invariance proposition.
Baseball is ideal for economic studies, because player statistics allow researchers to judge the value of a player, and compare it to his salary. And there is a market for ball players in the form of the National Baseball League, as teams compete for the most efficient allocation of money for talent. But matching talent to salary is only one of the team's goals. They also have special needs. The Baltimore Orioles may be in desperate need of a good pitcher, whereas the New York Yankees already have several. The Yankees should then offer to sell one of their pitchers to the Orioles, because the Yankees get a profit from the deal (good for affording the other players they need), and the Orioles get a pitcher that will score more victories for them. Some teams have more money than others, of course, but in the long run, the teams should reach a complex equilibrium between salary, talent and need. When an inefficiency exists in this system, teams have a mutual incentive to make a deal, as described by the Coase theorem.
Between 1879 and 1976, baseball players were the "property" of team owners. A player could only negotiate his salary with the team that owned him, and only the team could trade or sell him. In 1976, however, this system was partially replaced by free agency. Teams owned players only for the first six years of their career; after that, players became their own owners -- "free agents" -- able to sell their services to the highest bidder. According to the Coase theorem, this change of property ownership should have had no effect on the mobility of the players between teams. The same equilibrium between salary, talent and need should have persisted, the only difference being that the players now received the profits from their sale, not the teams. Is this what happens in practice?
No. An exhaustive study by Timothy Hylan, Maureen Lage and Michael Treglia found that pitchers moved between teams much more frequently in their first six years than they did later as free agents. Their study included the mobility of all pitchers in the NBL between 1961 and 1992, and controlled for such variables as player ability, team characteristics, player self-selection, etc. Were the changes in mobility due to transaction costs? No, they were roughly the same before and after free agency, and should have made no difference. Were they due to wealth effects? But the authors note that previous studies had not detected significant wealth effects in major league baseball. The authors write: "The results of this paper lead to a rejection of the invariance thesis of the Coase theorem." (7)
The Coase theorem suffers from too many practical and theoretical flaws to be considered a serious proposal for environmental policy. Even if a few working examples could be found, they would be extremely rare. This hardly justifies assigning strong property rights and letting market forces rip.
In reading the Coase literature, one is struck over and over again by the environmental naïveté of its economists. Coasians talk about "efficient" levels of pollution that no environmentalist would ever accept. Indeed, no Coasian has yet explained why the "efficient" levels of pollution allowed under the Coase theorem are justified in a purely environmental, social and non-economic sense. According to environmental science -- which is, unlike economics, a hard science -- the world's environmental crisis is worsening. We need to establish a sustainable economy, not one that adds to the net level of environmental destruction, however slowly and "efficiently."
Some of the Coasian literature has to be read to be believed. One of Coase's observations, which was subsequently taken up by his followers, is that victims of pollution are equally responsible for it. For example, a factory that spews pollution downwind is responsible for the harm it causes people. But the people who have chosen to live downwind of the factory are also responsible, for they would not be harmed if they did not live there. (8)
This is the sort of statement that betrays a gross ignorance of environmental science. Apparently Coasians believe that environmental destruction is acceptable as long as no humans are immediately harmed. Such a view is oblivious to the long-term results, and the interconnectivity of all life. Unfortunately, even the most apparently trivial human action can degrade an entire ecosystem. An excellent example is the unthinking 19th century hunter who introduced rabbits to Australia. Unfortunately, Australia has none of the predators that would keep the rabbit population in check, and it subsequently exploded. Today, rabbits have overgrazed vast territories, and you can find them lying around dying by the score. The idea that humans can pollute freely as long as they get out of the way cannot be considered serious science.
Coasians nonetheless point out that it's wrong to build a music studio next to a noisy factory, and then demand damages for disturbing the peace. Fair enough. But to claim that air pollution is the equal fault of those suffer from it begs the question: How should the public handle its end of the responsibility? Moving far away from their workplaces only incurs the additional externalities of travel time and vehicle pollution. Meanwhile, Coasians would seek to deny the people democratic control over industry. And the people certainly don't have control over industrial policy -- that's left to private capitalist owners. Still, in Coase's upside-down world, the people cause "harm" to factories by insisting that they clean up their pollution. Perpetrator and victim have switched roles: Coasians blame the victim.
In 1992, the Union of Concerned Scientists issued a World Scientists Warning, calling for a greater response by the world's governments to solve the environmental crisis. A majority of living Nobel prize winners signed the warning. But not one member of the Chicago School signed his name.
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1. Ronald Coase, The Firm, the Market and the Law (Chicago and London: University of Chicago Press, 1988), p. 1.
2. Natural Resources Defense Council, "BREATH-TAKING: Premature Mortality Due to Particulate Air Pollution in 239 American Cities," May, 1996.
3. United States Environmental Protection Agency, Office of Research and Development, "Health assessment document for 2,3,7,8-tetrachlorodibenzo-p-dioxin (TCDD) and related compounds," Volume III of III. (Washington DC: August 1994). EPA/600/BP-92/001c. External Review Draft.
4. Ronald Coase, "The Problem of Social Cost," Journal of Law and Economics, October, 1960, p. 15.
5. Coase, The Firm, the Market and the Law, p. 175.
6. Ibid., p. 174.
7. Timothy Hylan, Maureen Lage and Michael Treglia, "The Coase Theorem, Free Agency, and Major League Baseball: A Panel Study of Pitcher Mobility from 1961 to 1992," Southern Economic Journal, vol. 62, no. 4, April 1996, p. 1030.
8. Coase, "The Problem of Social Cost,", p. 2.
For more detailed rebuttals against the Coase theorem, see E.J. Mishan, "Economists Versus the Greens: An Exposition and a Critique," The Political Quarterly Publishing Co., Ltd., vol. 64, no. 2, April-June, 1993, pp. 222-242; E. Ray Canterbury and A. Marvasti, "The Coase Theorem as a Negative Externality," Journal of Economic Issues vol. 26, no. 4, December 1992, pp. 1179-1189; for an excellent, plain-English review of Coasian theory (written by an admirer), see Steven Medema, Ronald H. Coase (New York: St. Martin's Press, 1994), pp. 63-94.