Negative Externalities and the Coase Theorem – Learn Liberty


Voluntary exchange will only take place if
both parties perceive that they’re better off. Sometimes these exchanges result in spillovers.
We call these spillovers externalities. If a spillover is beneficial, we call these positive
externalities. If they’re costly, we call them negative externalities. Let’s talk about negative externalities
for a minute. Imagine being a corn farmer and growing corn. What are the private costs
that you face that help you determine how many ears of corn to grow? Things like fuel,
seed, fertilizer; these are your private costs. But it turns out that every spring and summer
when you lay down the fertilizer some of this flows into the stream nearby and flows into
a lake downstream, oftentimes resulting in large fish kills. All those downstream, the
fisherman, the recreationist, and the landowners all incur a negative externality. There are three broad categories of ways in
which we can address these externalities. The first is taxation, the second, regulation,
and the third is by using property rights and the Coase theorem. Let’s talk about
these individually. First taxation. Economist A. C, Pigou first
suggested that we could impose a tax on the producer that would reduce the amount of production
of whatever good is producing the negative externality. The benefit of this, of course,
is that you would reduce the amount of negative externality being imposed downstream. However
the difficulty is monitoring. It’s difficult to know exactly how much fertilizer is being
laid out in our example or how much pollution is being emitted from various point sources.
And so the monitoring costs are quite high. The second way that we can address externalities
is through regulation. There are many examples. Let me name two. One is through technology-specific
methods. This is where the government requires producers to use a certain technology to reduce
pollution or emissions. The benefit is that monitoring costs are quite low. You don’t
need to have somebody out there constantly monitoring the amount of emissions because
you know that technology is present and working. The downside is that it reduces the incentive
for firms to find innovative ways to further reduce their emissions. The second of these regulatory methods is
by simply restricting the quantity produced, either of the output or of the pollution being
produced through production. The benefit of this, of course, is that now firms have reason
to find innovative ways to reduce the pollution. The difficulty is that the monitoring costs
are quite high. The third broad way to address externalities
is the property rights solution suggested by economist Ronald Coase. He said if property
is well defined, divisible, and defendable, and negotiation costs or transaction costs
are low, simply by assigning the property right, we can overcome the externality. Well
defined, divisible, and defendable. These are the three characteristics that you must
have in order to have a fully functioning property rights solution. Well defined: what is the object over which
the owner has rights, in what manner may this owner exercise his or her rights? Divisible:
are these rights separable and can they be traded? Defendable: are these rights enforceable?
Are these rights recognized either by a custom, by the community, or a third government agent? Let’s go back to our example. Let’s assign
the property rights of the lake to the farmer. You may first imagine that the farmer doesn’t
change his or her behavior. However, now the fisherman and recreationist downstream can
negotiate with the farmer to reduce the amount of fertilizer that he or she lays on the field.
This reduces the amount of fish death downstream. We could also, conversely, assign the property
rights to the fisherman, whom you may initially think would require the farmer to stop using
fertilizer on the land. However, now the farmer has the incentive and the knowledge to negotiate
with the fisherman downstream. The fisherman will allow some positive amount of fertilizer,
but not as much as before. In each scenario, we come to a solution that
internalizes the externality or overcomes it. The fisherman and the farmer now know
the cost of the externality and are able to negotiate in order to overcome it. The benefit
of this to other regulations is that the monitoring costs are very small. Not only that, there
is incentive for either the farmer or the fisherman to find ways to reduce the negative
impact on social welfare. Coase theorem overcomes these monitoring costs by using local information
that is not available to an agent determining the taxation or regulation.

100 thoughts on “Negative Externalities and the Coase Theorem – Learn Liberty

  1. No it doesn't. It is an issue between the fishermen and their customers. If they deceive their customers (by saying the fish are safe when they aren't) then they are guilty of fraud. Their customers can sue for damages.

    But if they sell cheap "fertilized" fish without hiding the facts, then people are free to buy it if they think it is worth the risk.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 5) In the case of "global" pollution the problem is harder.

    Once an act is proven in court to cause harm, only an injunction is sufficient.

    If the plaintiffs agreed to a settlement, anyone else could sue cuz others are still harmed. The result is essentially an unlimited liability. You'd literally have to buy off every person and keep doing it as more people became adults.

    But proving who did the harm becomes very difficult, making this one of the weakest points of libertarianism IMO.

  10. But who decides what the value of the lost fish is compared to the additional crops? What if the fisherman values the joy of fishing in that exact spot because that's where his dad taught him how to fish? What if the farmer values his land cuz it has been in the family for generations?

    This is the problem with Coase's ideas. Values are subjective. Assigning disputed property rights based on some 3rd-party's idea of what it is worth is not justice.

  11. That's not true. It can still happen if they are self-interested and rational. All that it requires is that they don't value the disputed property rights equally. And it is very likely that that is the case.

  12. 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.

  13. 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.

  14. 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.

  15. What is this assumption based on? Nothing?
    If I own my body and I own my home why shouldn't I have full property rights to that and why shouldn't any pollution at all without my consent be considered a violation?

  16. I'm just saying it is _a_ starting point. I don't know if it is correct. Any transitioning would be hard. The correct answer is probably a more complicated form of "who was there first?"

    I build a factory in the middle of nowhere. It takes up 1 acre, but the pollution spreads for 10 acres. Then you come along and build a house within that 10 acres. You can't sue me and say I'm harming you.

    But if I build a factory next to your house and start polluting, then I am definitely harming you.

  17. 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.

  18. It's incredible how this guy doesn't notice the fact that not even land owners may know how much externalities are affecting their land and he assumes that everyone lives in a bubble, which countries are polluting my air? my ocean?.

    Why liberals are always so simplistic?
    (sorry for my english, did the best I could)

  19. Sort of, but not quite. True justice isn't a question of jurisdiction. I would prefer if jurisdiction of city gov't was based on explicit contracts with residents, sort-of like strata corps. Strata corps have certain contractual rights. You can't sell without the buyer signing the strata contract. The corp. can regulate as it pleases. But it can only regulate people who signed the contract or are on the corp's land.

    I.e. outsiders aren't covered by the regulation. But they can sue or be sued.

  20. its simple, two people live beside each other and don't agree on pollution levels.

    this theorem is just silly, quite frankly i think that this really shows a lack of scientific process in the field of economics if this kind of crap is Nobel prize material.

  21. 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?

  22. 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.

  23. The channel Learn Liberty is owned by an organization called "Institute for Humane Studies" which is chaired by the Koch brothers. "Learn Liberty" contributors are paid to produce right-wing propaganda following the corporate agenda of the Koch brothers et al, who have also contributed millions to fascist organizations in the US.

    You can find this information on their website and their wikipedia page, though someone in IHS seems to keep a close eye on the wiki page to control its content.

  24. 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.

  25. 'The one who wants zero pollution would actually have to prove (beyond a reasonable doubt) that the pollution was harming him or his property.'

    it is obvious you have little scientific understanding because with alot of pollutants ANY level of pollution is a hazard to human health (because they are often carcinogenic) and ANY level of pollution can cause more acidic rain which speeds up the natural decomposition.

  26. I don't think my level of scientific knowledge is really the point. The question is, did somebody harm someone else? Hurting people is wrong. No amount of "business development" makes it right. The only way it is OK is if the harmed person voluntarily agrees to it because he has been compensated.

    In reality, people are willing to live with some pollution. Those people will voluntarily choose to live in places with some pollution to gain the benefits. Other people will choose to live far away.

  27. well, yes your scientific background is the problem. because you aren't getting the concept that no economic activity could happen at all under your system, because you really don't understand pollution.

    I already explained it very well you are just choosing to ignore the facts I've already shown.

  28. I think you misunderstand the basis of your own argument.

    You argue that someone could say 'Hey, I want zero pollutants!'

    The question is, does he have the right (to live without pollutants)? Would you actually be able to reduce pollutants enough for that right to be enforceable? What about other parties that pollute?

    Obviously, a 3rd party would be an intermediary between them in that case, most probably a court system. They would then define those terms (pollution, rights, etc.).

  29. well if you are going to include a court system and a standardized amount of acceptable pollution then you are just using our current system.

    courts aren't a free market function they are the use of government force, they are exactly the same as government officials telling you what the pollution limit is.

    so, no, i don't see your arguement

  30. 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.

  31. 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.

  32. 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.

  33. 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.

  34. 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.

  35. the amount of negative externalities that occurs from your example wouldnt be worth the cost of going to court, because rubber air particles are not a problem when it comes to air pollution. (Not a big one anyway). but lets say your example is the primary source of pollution. the car driver (the one using the product that results in pollution) would most likely be responsible in court. who would sue? anyone that can prove that rubber pollution is the leading pollutant and caused them harm.

  36. 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).

  37. 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.

  38. 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 –

  39. – 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 –

  40. – one government inspection agent to look the other way than pay continuous bribes to numerous different inspectors of various courts, rating agencies and investigation firms, constantly and proactively keeping tabs for anyone who suspects me and starts up a new firm to find out… Hell, at that point, why not just negotiate some easements and be done with it?

  41. 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)

  42. 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.

  43. 1. a democracy doesnt represent the people, it represents the majority.
    2. in our republic you have a right to a trial. and you just said that a tax would bypass that.
    3. and even if there was a government that represented the people, the money collected from the carbon tax would never go to cleaning the air. just like SS money has never gone into paying SS, its used to fund other things first.

  44. never said there was a perfect system, you just said that a democracy represents the "people". it does not and it is not the definition.

    on the carbon tax, the institute of energy has reported that it would be a hindrance on the economy and when it comes to climate change have such a negligible effect that its not even up for discussion.

    its fine if you want taxes imposed on you by a forceful entity which will kill you if you resist, but just know it is not necessary to get clean air.

  45. I would rather have the government sue the polluters, then give the winnings(?) directly back to affected parties. I don't want them to just turn a carbon tax into more roads, government salaries, prisons, bad schools, corporate bailouts, bad welfare programs, etc. etc.

  46. 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.

  47. "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?

  48. A police officer can threaten to kill you, but any case where somebody is actually killed is about more than just the victim resisting arrest. Killing people simply for resisting happens in China and North Korea, not in prosperous G20 nations like the ones we live in. We really need to get over these outdated, black-and-white views of the role of government, and start talking about honest solutions to our biggest problems.

    I love how the guy in the video doesn't criticize the solution he likes.

  49. if i didnt want to pay taxes (say SS), then i would get fined by the government, they would take my stuff, try to arrest me. if i resist arrest and theft of the property i worked for they forcibly imprison me or the officers will shoot me/kill me.

    i assumed people understood what resisting was. resisting is not "i wont pay taxes, arrest me" its actually…resisting. trying to stop someone from imposing force on you.

  50. If officers killed you, it would be because you "resisted" in a way that compelled them to do so. I was referring specifically to the claim that "the government" kills people for resisting, when in reality it's up to the circumstances. It's fine if you have such a black-and-white hivemind view of the government's role in society. Other people don't.

    Jail is another matter. I think that we're doing the jail system all wrong. Giving the same punishment for vastly different crimes is just silly.

  51. 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.

  52. There is no such thing as an externality. Externalities are effects of production which, in order to avoid costs and repercussions, are simply not regarded as costs by the producers themselves. The farmer, knowing that his fertilizer is causing damage, should simply pay for that damage, or else figure out a way to farm without polluting. If he can't, the result is very simple; he has not created a cost-efficient, productive enterprise, and should go out of business.

  53. 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.

  54. WTF! Is this a Government Service Announcement? Readying the folks for private land confiscation through taxation and regulation. So many things wrong in this vid..

  55. So, with property rights all we're doing is passing the monitoring costs to whoever in this situation does not hold the property rights?

  56. If you despise polite left handers, than I doubt you'll like Ned Flanders, or his creepy little offspring Rod and Todd.

  57. 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.

  58. 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? 

  59. 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.

  60. Once again proving that Libertarianism doesn't scale.  Or perhaps more correctly, the "property right" option 3 is simply a very scaled down version of taxes or regulations.

    The fantasy presented requires the river to be owned by a specific someone or at best a small collection of someones.  Yet, it's a natural river…there are a massive number of people who rely upon it for a number of differing uses.  Fishing, drinking water, transportation, sewage, industrial waste disposal, power, etc.  Whom specifically do you assign ownership of the river?  Just one person?  Or a group of people?

    If the river (lets say the Colorado river) has just one owner or even a small group, there is no "free market": It's the very definition of monopoly and there is absolutely no incentive for the owner to not gouge every user (of which there are millions) for every last cent.

    Once the ownership group is significantly large it effectively becomes a commonwealth of the People, and your "payments" and "agreements" are just simply alternate names for taxes and regulations.

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

  62.  
    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?

  63. 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.

  64. property rights are only as valid as the government that enforces them. no guns = no property.  most people would not shoot the government because they are out gunned so they are hypocrites. 
    If you shoot anyone over property than you have to shoot everyone who violates that, or you are a hypocrite. hypocrisy and ignorance make property rights  impossible to maintain.

  65. He's assuming the fisherman have money? The "monitoring costs" are worth it to prevent environmental disasters or climate change. This Coase 'theorem' makes no sense.

  66. 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.

  67. Why do people assume judges and lawyers are free?
    In a real life scenario, it would take years to come to any arrangement, for every individual scenario.

  68. Coase's theory doesn't address made up externalities like the CO2 racket or the grievance group shakedown industry who make up wild claims of superstition with historical revision.

  69. very difficult to understand the description as far as Indian students are concerned…..words are not clear

  70. 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.

  71. What if they are not fish being killed but instead children? Do the parents still have to negotiate to stop having their children killed? The main advantage of the third choice is it is least expensive to implement particularly if the externality goes unnoticed or is difficult to prove – great for billionaires – not so good for the other 99% who live with the consequences. Side Note: Is the narrator purposely dressing like Robin Hood as some sort of subliminal message?

  72. Not much of a discussion of the Coase Theorem or its corollaries…plus, he just brushes away the idea of technology specific regulations – after barely introducing it – by saying firms would have no incentive to innovate if such a regulation was adopted. But private firms can and do develop technology and sell it. If the goal is to reduce pollution, a firm that developed a more efficient technology could profit by selling it.
    There might be difficulties facilitating the adoption of a new technology if there is an entrenched provider of a required technology, but it has been done before

  73. Not a great example. The conditions for the coase theorem to be met just aren't present here. Unclearly defined property rights, transaction costs high.

  74. coase theorem doesnt address the actual problem of the existence of the pollution, it only comes up with a way for one party to bribe the other to look the other way and ignore the problem. the problem still exists just no ones complaining. note the difference.

  75. 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.

  76. We should assign private property rights of the lake to the fish, that way the farmers can stop polluting and the fishermen will no hunt and kill the fish lol. But on a serious note, Coase's Theorem is total bullshit, learned about it in my public finance course. It makes some sense from a strictly economic perspective but hardly reflects the major principles of democratic values. Assigning property rights of a lake to a single person or firm means you can ignore the surrounding community's right to life, property, and liberty. Life in the form of safe drinking water, property in the form of home values (no one wants to live near a polluted lake) and liberty in the form of being free from the asymmetrical power and complete discretion the lake owner wields.

  77. Behavioral economics and empirical studies suggest that Coase's Theorem only works on white boards. [see Richard Thaler]

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