Negative Externalities and the Coase Theorem, Explained

What are negative and positive externalities? How does it relate to the Coase Theorem? Learn more: bit.ly/1HVAtKP
In economic activity, there are sometimes 'externalities' or spillover effects to other people not involved in the original exchange. Positive externalities result in beneficial outcomes for others, but negative externalities impose costs on others.
Prof. Sean Mulholland addresses a classic example of a negative externality, pollution, and describes three possible solutions for the problem: taxation, government regulation, and property rights. The first two options are difficult to monitor and may create perverse incentives.
A better solution to overcome the externality is property rights, as described by Ronald Coase. As long as property rights are well-defined, divisible, and defendable, parties can negotiate to reduce the impact of the pollution.
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[@NickDanger3]

Coase did NOT say his theorem applies when transaction costs are "low." He said it applies when there are NO transaction costs. In other words, the Coase Theorem essentially never applies. Coase states this very explicitly.

[@lexagon9295]

Gene Callahan To be fair, there is a possibility of an equilibrium even with "just" sufficiently low transaction costs.

[@goranmilic442]

@@lexagon9295 If monitoring is difficult in "taxation" example, why is it not difficult in "property rights" example?

[@sie7e]

@@goranmilic442 questions like that in economy? how you dare!?

[@dostthouevenlogicbrethren1739]

@@goranmilic442 Because you have sufficient evidence of the exact damages caused. When you sue the corn farmer, in this example, for polluting your water source in your fishery, you have an actual cost of the damages it caused. Taxation and regulation don't seek costs of damages. They regulate emissions, which is a major difference. The other factor is that enforcing regulations and taxations themselves have negative externalities. Consider the implementation of our carbon tax here in Canada. By introducing a carbon tax on the emissions of CO2, we put an extra burden on businesses and companies, especially ones in industries that already have high emissions....such as airlines. Yet airlines operate internationally. Our international airport here in town saw the price of flights with Air Canada and Westjet (the only two major airlines left in Canada) skyrocket. But the same was not the case for United Airlines, American Airlines, British Airlines, Virgin, etc., etc.. And as a result, people who now had less disposable income due to higher taxes passed onto them at grocery stores, fuel pumps, and heating (you can imagine our heating bills get pretty hefty when our winters reach down to -40), so they opted to purchase cheaper tickets. The carbon tax had the inadvertent effect of merely outsourcing our industry to the US, Britain, etc. And so the government had to introduce new regulations to protect Canadian businesses from the costs caused by the first regulations. Now, airlines are exempt....and so are most of the major polluters in the country. Prices are determined by a multitude of factors. Supply and demand are only one piece of a large puzzle. Cost of labour is another. The notion that there was no cost to pollution isn't actually true. There was: in the form of additional costs of labour. It takes people to produce the power, plants to store and ship it, and factories for you to manufacture goods out of and use this energy....all needing staff, and more shipping to get to and from. These costs have always been there, and always will. The carbon tax doesn't address them. It only adds an additional cost to one tiny fraction of that. The way to reduce overhead from these costs isn't avoiding that tax. It's in bulk. The more you produce, the less cost per unit. The carbon tax didn't create an environment to promote green energy. It merely gave multi-billion dollar corporations a means to reduce their own overhead by investing in green energy...but ONLY if they DON'T reduce the cost of goods accordingly. So now we have large corporations reducing their overhead, yet prices still remaining the same. But small startup companies, green or otherwise, have a large overhead due to smaller amount of goods produced. They cannot compete, and as such, it is local and small businesses that suffer at the expense of large corporations. That's why our energy is provided by one monopoly that uses coal and natural gas...and a solar farm that has been operational since several years before the introduction of our carbon tax, filed for bankruptcy and shut down. This is the unintended consequence of governmental regulations, and their own negative externalities.

[@dostthouevenlogicbrethren1739]

And the laws of thermodynamics apply to isolated systems, which never exist. Doesn't mean that they don't give insight and useful application to other systems. It's called a theorem for a reason. That reason. Application of it to other systems merely means additional variables will also cause other factors in relation to them. Economics is a chaotic system. So is our universe. But that doesn't mean the variables have no impact. Rather it means they do. And that's why we study them in theory, which tells us how they function on their own, isolated, so that we can then know how they apply to the entire group.

[@Tamutu-1]

But what if a big firm comes to these fishermen which own the lake, and pays them a significant amount of money, enough for them to not care about future implications of river pollution? This means the theorem served its purpose in the short run and both parties are satisfied, but future generations aren't consulted and are harmed as a consequence, before even seeing the river.

[@SphincterOfDoom]

This literally assumes what the values are of the future generation, which means you can't say they're harmed. Of course by your own logic every single transaction doesn't ask future generations, so the actual value of anything isn't real and they're inevitably harmed, making such logic asinine and useless.

[@goranmilic442]

​@@SphincterOfDoom Why when libertarians make video about environment, in example there is always somebody polluting just up the creek and somebody is damaged just down the creek? In real life it's much more complicated, you don't know, without regulatory agencies, who did the pollution and how much. Also, if you can prove somebody directly polluted you, surely you can sue him in court, EPA or not?

[@maxamos7]

If you are held liable for damages it may not simply be a monetary fine. Knowingly hurting someone or even killing them with your pollutants could lead to prison, land confiscation, or even death penalties. Remember, in natural law you give up your right to life when you violate another person's. Regulations and taxes/fines can not get to that point.

[@jamesdoctor8079]

SphincterOfDoom it’s not a normative argument, it’s a positive argument. Will or will not this create pollution? By your logic, there should be any transaction allowed regardless of the consequences to future generations. Which is the ACTUAL asinine argument.

[@goranmilic442]

@@maxamos7 How can there be direct liability for damages if everybody or many pollutes and you can't determine direct polluter? Who do I sue for ozone holes? Who do I sue for the melting of icebergs if I don't own the icebergs?

[@lexagon9295]

This video almost completely glosses over the point that the applicability of Coase's theorem is wholly dependent on transaction costs. There are many cases in which the transaction costs are so high that it loses all efficacy. For instance, producer A sells a product to 1 million customers. The product turns out to be harmful, to varying degrees. All the customers individually decide to sue A, leading to extremely high transaction costs, in the form of court and lawyers fees and highly inefficient process economy (i.e. additional externalities). In that situation, a Pigouvian tax would possibly be a more efficient solution. This is essentially the rationale behind tobacco and alcohol taxation. Secondly, the approach presented here assumes that all negative externalities can be accounted for at the moment of their inception. Producer B and their customers might be completely blissfully unaware that the product is harmful. 30 years later the effects begin to show, by which time the product is no longer in production and B is no longer in business. In that case, the negative externalities cannot be internalized in an efficient manner. Product screening and testing (i.e. monitoring) is usually the most efficient way to deal with the issue in that situation. This is why pharmaceutical compounds are thoroughly tested before they're made available. Summa summarum, Coase's theorem is excellent, but it's not the most efficient approach in every situation, which is something that this video attempts to paint it as.

[@Tinchoguitarrista]

+lexagon In the first example, the costumers would join to sue A. Buy even if that's not the case, there's no way to determinate what is efficient or what is not, by a central planning institution. Only people, who legitimely owns their own property, and who no one but themselves know their own subjetive costs and utilities, can determinate what is efficient and can reveal it with their own actions. Illegitimate force is not efficience, it's force. In the second example, it is still law-enforcement what resolve the problem. If something happens 30 years later, and it can be proved, it is still the justice who determinates the solution; if the ex-producers have to pay or not cannot be determinated by you or me, it has to be a conflict that get resolved like all others conflicts resolve: in the court. Just like in the case of P&G and the water pollution. So I don't see any reason to intervene. People are perfectly able to reach agreement. If there's no agreement, it's a problem that justice (centralized or polycentric) will resolve. There's no economic reason, nor ethical authority, to tax. And even if it was, there's no possibility to know what is efficient, because everything stands on subjetivity and information that the state cannot, by definition, get.

[@ruzzaruzza]

I love your explanation!

[@gunnipeters6506]

Jesus someone with a brain on youtube !

[@gunnipeters6506]

Btw its just unrealistic to assume that there are situations without transaction costs

[@rohanvaswani9418]

It's economics, tons of assumptions are made in every single model that exists. Obviously, these might not hold perfectly in the real world, but its the best we can do to represent his idea. Also, no one said this is the most efficient method of reducing externalities, but merely a theory, as suggested by the name.

[@SaskatoonBerryPie]

I was going to go on a rant about this but you clearly covered it better than I could have.

[@objectivistathlete]

Something not mentioned... it's oftentimes difficult if not impossible to actually measure the magnitude of an externality, making government intervention impractical. However, the Coase theorem goes around that by actively internalizing the externality.

[@ThePeterDislikeShow]

Does it occur to people that in normal everyday life, "Pay up or I'll pollute" is called extortion?

[@SphincterOfDoom]

Does it occur that pollution to a nonzero degree can be worth the benefit you get? Thinking zero pollution as the standard is naive at best.

[@goranmilic442]

@@SphincterOfDoom Who thinks zero pollution? In my opinion, combination of government regulation and direct liability (where it can be determined) is the only way to go, to forbid one of those is pure ideology.

[@dostthouevenlogicbrethren1739]

@@goranmilic442 Yet that very principle has failed the world over. The data does not lie. The nations with the freest trade have the lowest carbon footprint per capita. The nations with the most centralized and government planned economies have the worst. There's a reason. And one I've seen first hand. Carbon emissions aren't the only negative externality. Government regulations create their own. Our newly imposed carbon tax created major problems with international trade, that forced our government to exempt the largest polluters. At the same time, giant corporations that can afford to spend the millions/billions on building new green energy do so, ONLY when they can do so to increase profits. When does this happen? ONLY when they continue to charge for carbon taxes, even on green energy. The larger their production, the lower the cost per unit. Small companies cannot compete. That's why our carbon tax bankrupted a small solar farm that was running for the last decade....and pushed their power production into the hands of the single monopoly they created in the first place (our energy used to be provincially owned and operated before being sold "privately"....as if selling a multi-billion dollar industry wouldn't turn it into a single monopoly by one billionaire)....which FYI, uses coal and natural gas to produce the majority of electricity. If instead, people were allowed to sue this government created monopoly if and when (and believe me, it happens a hell of a lot), they cause massive destruction to their property through pollution, there would be less ability for them to avoid the negative externality at the expense being passed onto their consumers, while preventing small businesses and startups from forming competition.

[@SphincterOfDoom]

@@goranmilic442 "Agree with me or you're the ideologue"

[@goranmilic442]

@@SphincterOfDoom Funny, but that's not what I'm saying. What I'm saying is people first come to conclusion about this (depended on their ideology), then they come up with reasons for that conclusion.

[@ChrisChong1]

thank you! this was, well scripted, animated, and recorded.

[@rawheas]

I'm actually a chemical engineering student workign at an environmental lab were we test for this kind of thing and I'll tell you a few things you should know. 1. there is no such thing as burning things pollution free, no matter what there are always trace amount of everything, so literally any lawsuit could be against everyone who mows lawn or drive a car in the world. 2. air quality testing is expensive and weather dependant, it would actually be cheaper and easier to regulate pollution.

[@OhNotThat]

That worked out wonderfully for the people of Bhopal....

[@Badeentencop]

makes me cry every time. no forgetting, no forgiving!

[@mangoswiss]

@roguas I think the video confuses the issue slightly as they show two scenarios. 1 - The farmer has the property rights for the lake and therefore he's paid by the fisherman to fish there but still has an incentive to reduce pollution. 2 - THe fisherman has the property rights to the lake and he is compensated by the farmer. Your example is the second scenario. The landowner doesn't pay the factory. The factory pays the landowner a compensation at an agreed price.

[@fullfreestreams9377]

McLovin doing good

[@chernobylcoleslaw6698]

LMAO

[@Anduie]

A Coasean bargain require well defined property rights, perfect knowledge, and a triggering mechanism. If the fishermen can't establish a right to fish, then no clean up will be done. If the fish kills can't be directly related to the farmer's actions (and they will often require proof that the individual farmer is doing it), nothing will be done. All of this requires some form of regulation and existence in an ideal world. It is far from expedient or efficient to rely on this in the real world.

[@richiemayne]

This is a problem that I've come to notice coming up a lot with ideas from the Chicago school. It is assumed that in every transaction each participant is on equal terms with the other, but this is rarely the case. It is something that is frequently overlooked/ignored.

[@StateExempt]

@mangoswiss - I agree with your analysis, since the fishermen are the ones who are affected by the farming, the burden should be on the farmer to compensate them for the loss they suffer from his actions. The factory should definitely be the one to pay the landowner since it is the factory that negatively affects the property of the nearby landowner. Damaging property has the same consequential effect on the land as partially stealing it, so the farmer/factory should pay accordingly.

[@noway63244]

5) This depends on the type of air pollution. If it is local smokestack pollution, then it can be dealt with in the same way. The neighbours will sue the factory. If the factory can establish that it has a "property right" to pollute in that area, then the neighbours will have to pay to get the factory to stop. Otherwise the neighbours could get an injunction against the factory.

[@lordnate2000]

The issue is that this idea assumes there is just one farmer and just one fisherman. When you realize there could be 1,000 farmers and 10,000 fisherman along a river, the situation becomes a lot more complicated. What about the Mississippi river? I like a lot of the videos on this youtube channel, but this one I just don't agree with at all.

[@changsam4499]

This is great method to some extent. 1. negative needs to be identified and could be measured accurately. 2. both "cause and effect" group or one need to be well defined. 3. two entity should be able to negotiate fairly. with satisfied conditions, causing and affected one or group may work it out easily.

[@noway63244]

3) This depends on the theory of property rights used by local courts/custom. Under the homesteading theory, it would likely be people who had been fishing in that place for some period of time. It may only include people who had been fishing since before the farmer started using fertilizer. But the exact answer would depend on the specifics of the case.

[@balduran2003]

The problem with your description is that the burden of proof lies with the injured party. Since most polluting activities have a directed benefit and a distributed cost, most will go unpunished because, though the pollution has a negative effect on a huge number of people, their individual incentive to fight it is low. Conversely, the offending party gains all the benefit, and therefore has high means and incentive to fight a lawsuit. Watch: Why Politicians Don't Cut Spending (learnliberty)

[@RayZfox]

So to be able to fish in the Mississippi river you would have to own 1,245,000 sq miles? I think property rights extend to the edge of your property, but no further. For example a company should not be allowed to run a sewage line to the edge of its property and have gravity let it flow onto your property. In the same manor a farmer should held responsible for the fertilizer that falls into the stream.

[@Dragonsscout]

The video didn't state the costs of the 'Property Rights' solution... namely the bargaining costs and free rider problem. I know it did state that they must be small, but they do exist and it should be asserted that trying to apply the last solution in scenarios where Coase's Theorem does not hold does nothing to solve the problem. That said, it's a great video. I wouldn't have bothered commenting otherwise.

[@ZT205]

Even very basic economic principles which *nobody* questions anymore, like supply and demand, are based on those assumptions. If given multiple options people will almost always pick the best one. We have to start somewhere; it's a pretty good place to start and there are ways to adjust for deviations, which are surprisingly rare. Even "hard sciences" are based on general principles that have exceptions in specific cases (or at least started out and are still taught like that on an intro level.)

[@donfolstar]

This is an interesting idea, but it leaves me with several questions. -How are fisherman going to know more than government regulators? -Wouldn't any claims of a breach of contract require the same monitoring costs Coase Theorem was attempting to avoid? -If the fisherman pays the farmer to stop polluting what is to stop others from polluting the lake just to receive funds to stop doing so? I am guessing there are explanations for all this in the theory, it winning a Nobel Prize and all.

[@RKAddict101]

You provided an example of the Coase Theorem where it works with liberty. In many situations, it in fact does not, and is hostile to private property rights.

[@donfolstar]

@bsabruzzo Thank you taking the time to answer. I do not know if it is the choppy nature of your answers, but they all seem pretty unsatisfying. 1. Are we to assume the fisherman is a marine biologist with a specialty in toxicity and has a lab adequate for testing? He would have to pay someone to do the testing. Though why should the fisherman pay to test water that other people use too? DC might be 1k miles away but field offices are a thing. Walmart doesn't fail outside Arkansas.

[@heyisthatdes]

oMG THANK YOU SO MUCH SERIOUSLY. I've been struggling to understand this.

[@Anduie]

Garbage dumping, if I'm not mistaken, is considered trespass (I'm no lawsmith by any means) and doesn't really mesh well with the framework of a Coasean bargain due to the excludable nature of private property (your lawn). What I'm getting at is the bargain, for it to work out in the idealized sense, would require you to know the involved actors and all actors would have to be able to rationally monetize their costs and benefits. Of course, some are hardly that honest and willing.

[@michalkononenko9833]

I agree with you, although I don't think the Mississippi would qualify as a good candidate to apply the Coase Theorem, as the property rights to the river are not easily divisible. Consequently, to correct this market failure, the solution is to assign the property rights to a government responsible to the people that can then act to regulate the pollution in the Mississippi.

[@ab7dasker]

This explanation is just too simple to be taken seriously. Transaction costs prevent the Coase Theorem from applying in any situation. Moreover, Property Rights become indefensible and indivisible when the externality is widely distributed (over space or time). Global Warming is maybe the ultimate example of this, where everyone shares the global atmosphere and therefor the costs of global warming, in addition to those costs being incurred decades or centuries after the production takes place. For temporally and spatially distributed externalities like global warming taxation and regulation are the only viable options.

[@lordnate2000]

My theory is, if the body of water is only on one individual's land, then the individual can do whatever he/she thinks should be done. If it is on more than one land owners property, it is a county issue. If its on more than one county, then its a state issue. If its on more than one state, its a federal issue. Same can be applied to air pollution or any form. Just depends on what areas are being polluted.

[@RavemastaJ]

Except that I didn't advocate for the court to determine the limit, but to identify and define the specifics of rights for both individuals. Since both individuals have vested interests, a third party would have to be designated in order to do this. This is not the same as an oversight committee, rather it lays down the groundwork for similar cases, determining what both sides can and can't do to each other. The terms would then be created within those guidelines.

[@SkormFlinxingGlock]

My guess is it would go something like this: We all own the air equally. So as long as it can be proven definitively that party A (say an industrial corporation) has polluted the air that party B (say a city) uses, then party B can impose a cost on party A through litigation, successfully suing them in court. It's fairly simple really as long as you define who owns what as I did initially. The only tricky part is proving who damaged whose property, and what the monetary penalty should be.

[@BuckField]

Historical point: taxing negative externalities dates from long before Pigou, and if we include physical non-monetary punishment for a broad definition of negative externalities, it predates humans. Certainly religious penances would seem to count though. While we may agree Coase's theoretical frame, "Prof." Mulholland asserts the farmer and the fishermen "know the cost" of the fertilizer, very much contrary to Coase's conclusions. Perfect information is impossible enough, but to hinge such a strong position on perfect information of future events seems dogmatic. I would be curious as to how this model assigns costs of a fisherman's child who dies from eating a fertilizer-contaminated fish, and who pays for the research necessary to establish that as the cause, and a zillion other confounding, real world factors. Like Adam Smith, Coase pointed out that perfect free market theoretical models are not viable in the real world, although some data switching arbitrage in computer networks appears to come close.

[@vonGleichenT]

Profit = Positive Loss = Negative really easy to understand.

[@ticket88]

And...what about the people who are the customers of the fisherman (who sell their catch on the free market)? How much pollution must they be allowed to tolerate in their food supply? Do the fish buyers also get property rights to negotiate with the farmer to control the amount of fertilizer and pesticide he/she uses that will wash downstream? (Hint: they get property rights in the ballot box when they send someone to the capital to negotiate their interests, as do the farmers/fishermen.)

[@noway63244]

You could start with assuming that the businesses have a "property right" to pollute at the current levels. Any increase would violate the residents' rights. Then anyone who could demonstrate a reason why this shouldn't apply to his area could dispute it in court. Residents who want better air could pay off the businesses to reduce pollution. Residents who don't care about the air could be paid to live with more pollution. But 100% of residents would have to agree to the increased pollution.

[@FourthRoot]

The problem is that polluters don't simply pollute one city's air. They contribute to a problem that affects a very large area, if not the entire world. Suppose I own a factory that releases CFCs into the atmosphere (CFCs thin the ozone layer but don't have any localized effects). Suppose these emissions effectively sap the world economy of $100k every year. In that case, the share of my damages that I owe to a large city like New York, would only be $100 or $200. Not worth suing over.

[@ticket88]

To whom are you going to assign rights to the Oceans? What about a stream, or a river, that doesn't end in a lake, but goes through several states and terminates in an entirely different country? This model (like most Libertarian philosophy) looks fabulous in a limited example on paper, but doesn't work in real life.

[@ZT205]

If they're self-interested and rational, that won't happen. Your objections can be applied to literally every economic argument. But assuming they are (which is an explicit assumption of the theorem), then the fisherman would sell the rights for some amount in between what he has to loose and what the farmer has to gain, thus helping both parties and leading to the most efficient outcome.

[@noway63244]

4) I don't fully understand the reasons the video claimed that monitoring costs would be lower. It could be lower because the farmer and fisherman could build up some trust. It could also just be that the monitoring cost is paid by the two people involved in the contract. Then it isn't lower, but innocent 3rd parties don't have to pay it.

[@TheCrimson7272]

it would be expensive and impractical but the market would react to the few successful sueings and stop the purchasing on rubber tires (in the fear of being sued). there would then be more demand for "safer" tires because the cost of owning an old rubber tire would include the cost of someone sueing you. (btw after just one successful case sueing costs would be next to nothing because you could just reference the previous lawsuit).

[@ZT205]

Unfortunately most explanations of the Coase theorum leave out its assumptions, which are: 1. No transaction costs 2. Everyone has accurate information 3. The existence of a property rights system. When you deal with issues on an international level or sometimes even a national level, these conditions are rarely satisfied. Ie, there's noway the Maldives can sue for being flooded, there are political costs for signing onto treaties like Kyoto, and people dispute the science.

[@archofthedark]

Of the two ways of implementing the property right solution, both are easily exploitable and corruptible. If you give the farmer the rights, you're asking lone private citizens to make up the difference in profit the fertilizer would create, and that's allot of strain to put on a small group. Giving it shared ownership to private citizens puts a strain your rules of "well defined" and "defensible" to it's limit, because the different people will want to handle it their own way.

[@OptimalOwl]

You know, the public ones are also bribable, and even when they're not overtly corrupt, they're usually culled from the same industry they're called upon to regulate, meaning they're going to have some biases and preconceptions. The difference is that people recognize and can clearly assess the incentive structure of private enterprise. Anyone who hears private regulation being sugested will point out that they can be bribed, but they will usually need it pointed out to them that government -

[@pochopaz7381]

But the last one gets more complex and difficult to implement as the negative externalities get more broad. For example, if the polution that was killing the fishes was happening on a much greater scale it would have a deeper economic impact which will make the implications far greater and complex making the transaction far more complicated.

[@jceess]

@13lackLight I think paying out millions of residents' and landowners' damage claims would be an extreme drain on the finances of polluting industries (insurance companies could pay the claim to the customer, and then go after the industries themselves to get that money back), to the point where it would simply become unfeasible to even build near a populated area. They would either find ways of reducing pollution or build elsewhere.

[@ZT205]

That's not the case at all. The Coase theorum is a formal theorem, just like a mathematical one. I encourage you to look it up the actual theorum. The "softer" part is applying it to real life and making sure the assumptions are actually satisfied (just like applying a mathematical method to an engineering problem.) Experiments in economics are just as repeatable as experiments in, say, biology.

[@majinspy]

Actually I did take intro to economics, and I had solid grades considering it had nothing to do with my major. I enjoyed them immensely. I still don't think your argument is satisfyingly answers the objections. You seem to be saying that it will usually work, and we have to start somewhere. Well, that's unimpressive to me. I think government regulations are better. You yourself, in an earlier comment, raise similar objections to this argument.

[@noway63244]

In most cases, at some price the fisherman would either switch to fishing somewhere else or will stop fishing all together. But if the fertilizer is very bad, then perhaps many fisherman will demand such a high price that the farmers won't be want to pay it. In that case the pollution would stop.

[@peastue]

This model is suspect: it assumes that all parties involved negotiate on equal terms and will be able to determine "true" costs by this direct market interaction. But how often do such negotiations occur on truly equal terms, in which neither party has a decisive advantage over the other? Granting legal ownership rights immediately skews this relationship. The cost of monitoring is simply relocated, not reduced by "natural" cause.

[@elharbingero]

@LouieArrighi If you think corporations are invulnerable to lawsuits you're nuts. BP's oil spill is a perfect example of where property owners could sue and expect to win, which is why BP immediately ponied up billions to settle damages. One thing the gov't has done at times (and might still do) is limit the liability of drillers, meaning they faced less losses if a spill happened. In that case the gov't is infringing on our right to sue. Carbon pollution, admittedly, is vastly more complex...

[@noway63244]

The negotiations don't have to happen on equal terms. Lots of individuals have won claims against big companies in court. It is also not necessary to determine "true" costs. Each party only needs to decide what it is worth to himself. I don't see how having a 3rd-party (gov't) deciding the relative costs/benefits in a blanket manner is better. I agree that the video failed to make a good case for monitoring costs going down.

[@whomonkyoulus]

Coase explicitly rejected your interpretation. His theorem required that there be no friction, but he stated that high friction existed, especially in property. In a frictionless world, property rights would be just as good as Pigovian taxes, but since that is not the case, why promote the lessor option? Good question. Who do you shill for?

[@grifteamgost]

Mr. President, please watch this video so you can learn how a Nobel Prize winning economist shows not only how "we the people" don't need big brother regulating our lives in an economic manner, but how it is in fact a less effective and costlier method to achieve the goal of protecting the people and their interests.

[@majinspy]

You completey skirt my objections. What if they aren't motivated by money? What if they disagree on the amount involved? Can one fisherman shut down 10,000 acres of farms because he likes fishing? Do you think if he did decide to sell his "pollution rights" he would sell them for the mere amount of money the fish are worth to him, or would he charge millions because that's how much the farmers would stand to lose?

[@TheCrimson7272]

the person who owns the land that is being polluted on will be the one who sues. of course, when the government doesn't follow up on the individuals rights of property, that does not mean that the theory does not apply. taxes, especially ones that are not used for funding but merely as a "punishment" to businesses, usually results in the economy suffering and firms leaving the industry. taxes also have a "moral" factor because like you have probably heard before, forced taxes is stealing.

[@libalchris]

@13lackLight Agreed These videos cover so much and show how free markets solve so many problems, except air pollution and global warming (a result of co2 increase in the atmosphere) The problem is that due to diffusion what you do to your air effects everyone else's air, so creating property rights for air doesn't actually solve the problem. In this case it seems the only solution is a government solution regulating the air. I'd love to hear if these guys or someone else has another idea.

[@OptimalOwl]

- regulators can also be bribed. But the big difference is that private regulators are pushed by competition to maintain their reputation, so that people will continue to trust their judgment rather than that of their competitors. Government regulators have a lot more leeway to commit bribery and abuse the trust of their costumers, because they cannot easily be replaced. If I wanted to get away with negative externalities, I'd much rather pay -

[@noway63244]

The important thing in that case would be to keep the regulations confined to the city. Those outside the city wouldn't be procecuted under those regulations. Instead if an outsider polluted the city's air, the city would sue the outsider for tresspass. Or if the city polluted the outsider's air, the outsider could sue the city.

[@AnkeborgsAnkdamm]

It depends on how many are affected by the pollution; there would be different solutions in large and small cases. The small case would work similarly as when pollution floats through the water killing some fish, as when it travells through air (and making someone get more cancer or something). Those disturbed by the polluter can either pay him to stop polluting or be paid (or not accept money) for him to be able to pollute. For more and the logic see "Law's Order" or World according to Coase.

[@noway63244]

I'm sorry. My previous comment was too simplistic. The one who wants zero pollution would actually have to prove (beyond a reasonable doubt) that the pollution was harming him or his property. I do believe that a transition to a system which address pollution via strong property rights would be a big challenge. But once such a system is in place, it is entirely possible for certain areas to have higher levels of pollution than others. People could decide for themselves about the tradeoffs.

[@noway63244]

If the two people can't agree then the "legal" level of pollution would probably be the lower level (though it would actually depend on who was there first and what level of pollution was already there when the 2nd person moved in). How is this a problem?

[@meghaljani]

@chronDiggity In 1960, human CO2 emissions were 1 gigatons/year, now it is 9 gigitons/year. In both cases, the CO2 rise is 1.5 ppm year annually. Why CO2 rise is not 9 times higher than it was in 1960, and temperature rise consequently? sea levels have been stabilizing for last 3 years. Since the end of little ice age, the temperature rise was rapid. What caused that rapid rise? Similarly, after medial warm period, temperature decline was rapid. What caused those rapid temperature changes?

[@bsabruzzo]

@donfolstar "There has to be better answers to all this" As the gov't and the courts are a matter of force, the better way is for the parties to sit and figure things out. There are 2 thoughts on human behaviour: 1) People are generally good and will find a way or 2) People are generally bad and must be forced It is always better to assume #1 and protect against #2, if it happens. That gives you more options to fix the problem. The other way starts with the punishment 1st.

[@noway63244]

Search for "water privatization walter block" to find one answer. This author is not a fan of Coase, FYI. I don't think it is fair to say that this model doesn't work in real life. In the limited times/places it has been tried, I think it has worked somewhat well. But Coase is definitely lacking when it comes to defining the property rights, which is VERY important.

[@noway63244]

Sorry, I skipped some logical steps; I shouldn't have. 1) The important thing is to assign property rights in a just way. I think Lockean Homesteading Theroy isn't too bad. 2) When there's a dispute, the question is, did Mr. X homestead the right to pollute or did Mr. Y homestead the right to clean air? 3) Once the court decides who has the property right, the two parties can negotiate. Even if Mr. Y wins, he may decide to sell his right to clean air and the defendant will keep polluting.

[@FourthRoot]

Can't really be applied to say, air quality in a city. Everyone breathes the air, and everyone pollutes it. How do you manage who owes who how much for polluting the air? Fuel taxes and fees based on mandated emissions testing seems more manageable. Don't get me wrong, I'm a hard-core libertarian, and I know how property rights can be used to improve certain environmental problems, but not all.

[@bsabruzzo]

@donfolstar 3) Harm is determined by the courts AFTER the farmer and the fisherman (and the campers and the guy who just likes to sit on the docks of the bay) have talked. If fish are dying and it is attributable to the fertilizer, that's harm. If the farmer is just using the "cheap stuff" or using more than he might need, that's for the courts. There's always the possibility of using better fertilizer, using less, controling run-off and so on. Again, that is where courts of law co

[@Champraves311]

@Antepenult Well I wasn't making a valiant effort to argue my case but if anyone took a basic class in hydrology or water resources management they would learn that the Coase Theorem couldn't possibly apply to the example given either. I would also think that in order in act an economic system based on that model, it would have to be consistently widespread throughout, including the earth below a surveyed property. It was really developed only to given an excuse to apply neoliberalism.

[@jonescomplete]

@13lackLight pollution can be hindered through threat of compensation towards an individual that is harmed by the externality. property is not defined in China... in essence, the government can suddenly own anything at any time therefore there is less interest in land value. The government is often the prime mover in the local Chinese economies, and politicians are often own all of the land (indirectly), and do not care if they pollute a less profitable sector

[@sicktoaster]

just to afford food and live. Even if we assume it only kills fish, a river is public property. The externalities would be taken care of in a law influenced by consulting the farmer and fishermen.

[@roguas]

Problem is... 1 person has a nice piece of land and suddenly there is a factory next to it. It damages the land and people who were there in the first place dont want to pay to some factory that just arrived and is polluting their property, What then ?

[@ZT205]

No, that means the premises of the Coase theorem pertaining to transaction costs and information aren't satisfied and you need to use another solution, like Pigeou taxes.

[@Forestadash]

Please read Libertarian Manifesto by Murray Rothbard. He explains all the problems in clear and logical way

[@ZT205]

Coase never intended it to be used in every situation, and obviously situations like that require different strategies. However, there are many situations where a specific kind of air pollution is caused by a small group of people and effecting another specific group. The point is at no time does anyone need to "own" air. You think economics is a pseudoscience because this one solution doesn't work every single instance? Even hard science and engineering don't work like that.

[@ZT205]

No, you just need to understand it better before you criticize. Nobody gets "ownership" over air. You get ownership over land, and if anyone's air pollution is going to cause economic damage to the activity you're doing on that land, they have to pay you. Usually when people think they've debunked a nobel prize winner by watching one youtube video, the joke is on them, not the scientist. (Although the same may not be true for all the political/"peace" prizes....)

[@ihatemoses]

Since pollution effects everyone, you wouldn't even need to have the government keep it but redistribute it amongst all the nation's citizens equally. This would be a synthesis of point 1 and 3 because someone may own part of a lake but they don't own the whole environment.

[@MrCitsidas]

i think public property that is valuable enough to people to protect in the first place would not be public. it would be owned by people who have an interest in protecting it or using it. no-one could exploit the area for free, because the cost would equal the benefit and so they wouldn't have the profit incentive to do that. the second concern is knowing which polluter is at fault. well here technology can tell us what the air pollutants are and then any company emitting them would be liable.

[@13lackLight]

@jeffsandychelsea I don't mean that I just mean pollution in the atmosphere in general. L.A. for example and many Chinese megalopolises are known for having smog issues. What stops the pollution?

[@quidnick]

As long as money exists, no entity can take power over everything. It is the finite 'limit' to supreme control that the government hates.

[@melissaportillo3126]

as mentioned below, the video was great but Coase theorem states " with ZERO transaction cost..." not low. overall good video :)!

[@ThePeterDislikeShow]

Even with 0 transaction costs, this logic also assumes both parties have unlimited wealth. In practice, the party without the initial right may not be able to afford it, even if they value the right at a higher value. So in that case it would matter who is assigned the right initially. Another thing often neglected in coase theorem is that money spent on obtaining the right is money that isn't spent elsewhere. How does this affect the overall utilities of the parties after the coase transaction has completed?

[@AngelusMortis1000]

Also freerider problems. If people banded together, a lot might freeride on the notion that someone else will pay, thus reducing the wealth of the group. But who cares about poor people..

[@ThePeterDislikeShow]

Freeriding isn't a problem as long as someone eventually pays for it. Why? Because even the person who pays is better off --- he willingly paid it. Sure it's unfair, but it still achieves a better outcome.

[@AngelusMortis1000]

Well yeah, but it depends on the value it will create. If everyone values paying equally at 500, everyone expecting either others to pay or others to freeride, thus resulting in no one paying, thus no-one got better of. That's how socialism often isn't very useful. Next step would be regulation or taxation.  It's the prisoners dilemma.

[@ThePeterDislikeShow]

Another thing is coase assumes things are linear. In practice, especially with environmental issues, pollutants add synergistically. Pollutant A plus Pollutant B often becomes a much bigger issue than either alone. So in theory, efforts to cut one entirely are much better than efforts to cut both by half. How would coase handle this situation?

[@SphincterOfDoom]

+FortNikitaBullion It does not assume infinite wealth.

[@jack40k]

Great video!

[@PhailingTrumpeter]

This was filmed at Stonehill College wasn't it?

[@qeddeq1]

very good well organized explanation

[@bsabruzzo]

@shogu666 "ignoring the main solution that we should not be polluting environment on purpose in the first place" The system I explained creates an incentive other than force to not polute. Fisherman won't polute because he needs fish. Farmer stops his ACCIDENTAL polution (you may not have realize fertilizer run-off might have been not intentional) by monetary incentive. Deliberate pollution is a violation of property rights and, under the US Constitution in the USofA, is punishable

[@noway63244]

I don't think it falls apart. Coase really isn't the best representative of libertarianism here. 1) If the farmer and fisherman disagree an who owns the property, a court must decide. This is the same for if I disagree with my neighbour about the property line. Most libertarians I've read support the homesteading theory of property rights. But other theories could be used to decide.

[@RustyIronloins]

Not mentioned is that property rights also encourage technological innovation...

[@noway63244]

2) If neither side will take money, whoever was assigned the property rights by the court will be able to do as he pleases. If the court sides with the fisherman, then the fisherman will get an injunction against the farmer. If the court sides with the farmer, the fisherman will either have to put up with polluted fish or go somewhere else.

[@noway63244]

It doesn't require perfect knoweledge. It requires the standard of proof customary in local courts. No special regulation is needed. There is simply the law of torts as established by common law. If someone dumps garbage on my front lawn, I can sue him under tort law. As long as I can establish in court that I own my lawn and who dumped the garbage, I will win. Same goes for the example in the video. There does need to be principles for deciding who owns what. Coase didn't address this well.

[@wood_croft]

The problem is that the natural environment is not divisible! If the fish on that river went extinct, the whole food chain would be broken. The damage would be totally unpredictable.

[@noway63244]

That is a very old (and I think very poor) definition of property rights. It came about at a time when technology didn't allow digging deep tunnels or flying or space travel. If we actually enforced property rights like this, airlines would need to negotiate with each land owner. It is hard to say that an airplane 30,000 ft over my house harms me. I think the homesteading theory of property rights does a much better job of justly assigning property rights.

[@libalchris]

This is my problem with it. It works great for just about everything, except when it comes to air pollutants. Air pollutants don't just affect private property, it also affects public property. How is this dealt with? Above all that what about global warming? Too much carbon dioxide has a disastrous impact on society as a whole, which is why, while I believe in using the free market, I think the only solution to issues like air pollution is government regulation.

[@chadwells3139]

Corrupt ones make money since going to them gives you a better score. The private monitoring services are usually paid by the people they are monitoring. That would be like a jail with the prisoners paying the guards to count the number of prisoners.

[@FourthRoot]

You're also basically saying that governments should have no jurisdictional barriers.

[@TheCrimson7272]

the law system works that way. the burden of proof is always with the injured party, and if the injured party has no evidence of injury then no crime was committed. anyway, co-ops and unions have grouped together to stop offenses towards an entire group. there are green party and environmental groups who already spend millions trying to stop pollution. the idea that people are incapable to see the who picture is flawed, because in the long run people have an incentive.

[@ZacharySmith89]

Okay...so, how does this reduce monitoring costs, again?

[@MolsomTV]

Well explained

[@mindthreat44]

Yes. The people not yet born (Our children) bear the greatest cost of pollution. But lets ask this. Do you care about your children? Do you care about your grandchildren and so on? Hopefully you do. You being the caring parent that you are do what's best for your children. Give them good food, bathe them, protect them from bullies, and sue the polluters. The children aren't born, but you the parent are.

[@TheCrimson7272]

"cost spread across the whole world" so...air pollution? if so the damages to lungs or other organs can definitely be sued for. what exactly do you mean by the cost of carbon emissions?