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  • Coase paper: "The Problem of Social Cost

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    Darcio Ceniccola-Martins
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    This paper discusses the problem of social costs in economic activities that negatively impact others. It notes that the standard Pigouvian approach of taxing harmful activities may not always lead to the optimal economic outcome. Instead, the paper argues that if property rights are clearly defined and transactions costs are low, bargaining between the affected parties will lead to the outcome that maximizes total benefits. The allocation of property rights does not necessarily influence this optimal outcome as long as cooperation is possible.

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    This paper discusses the problem of social costs in economic activities that negatively impact others. It notes that the standard Pigouvian approach of taxing harmful activities may not always lead to the optimal economic outcome. Instead, the paper argues that if property rights are clearly defined and transactions costs are low, bargaining between the affected parties will lead to the outcome that maximizes total benefits. The allocation of property rights does not necessarily influence this optimal outcome as long as cooperation is possible.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    27 views9 pages

    Coase paper: "The Problem of Social Cost

    Uploaded by

    Darcio Ceniccola-Martins
    This paper discusses the problem of social costs in economic activities that negatively impact others. It notes that the standard Pigouvian approach of taxing harmful activities may not always lead to the optimal economic outcome. Instead, the paper argues that if property rights are clearly defined and transactions costs are low, bargaining between the affected parties will lead to the outcome that maximizes total benefits. The allocation of property rights does not necessarily influence this optimal outcome as long as cooperation is possible.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 9

    Coase paper

    The Problem of Social Cost


    Ronald Coase
    Coase, Ronald H.
    Journal of Law & Economics, 3: 1 44, 1960.

    The Problem
    Some actions of firms harm others
    Factory emits smoke which harms neighbors
    Cattle trample crops of adjacent farmers

    Standard Economic Analysis (Pigou)


    Make factory / rancher liable for damage
    Tax activity which causes damage
    Restrictive zoning of harmful activities

    Reciprocal Nature of Problem


    The presence of both parties is required for
    damage to occur.
    The presence of the rancher and farmers are a prerequisite to cattle damaging crops

    Either party can prevent the damage.


    The rancher can fence his property or reduce the size
    of his herd.
    The farmer can fence his property or leave adjacent
    land uncultivated.

    Economic Optimum
    The objective should be to maximize the
    value of the joint output of beef and grain.
    Consider the behavior of a single firm that
    owns ranch and farm land it will increase
    the size of the herd if the value of the
    additional beef exceeds the crop damage.

    Allocation of Property Rights


    The rancher is liable for any damage his
    cattle cause.
    The rancher can reduce the size of his herd,
    limiting his liability
    The rancher can fence his property
    The rancher can pay the farmer to leave land
    uncultivated, thus mitigating his damages.

    Coase Theorems
    I.

    If two parties negotiate freely, and if


    transactions costs are negligible, then they
    will arrive at the economic optimum
    The resources devoted to ranching and farming will depend on
    the value (market price * yield) of meat and grain.

    II.

    The optimum solution is not dependent upon


    the initial allocation of property rights.

    Transactions Costs
    In the presence of transactions costs, an optimal
    negotiated solution may not be achieved.
    The market has created mechanisms to
    minimize transactions costs.
    Single ownership of large tracts of land,
    or industrial projects
    Restrictive covenants

    commercial

    Although market transactions are be costly, the


    costs of government regulation may be greater.

    Restatement of Pigou
    Divergence between private and social cost
    arises when party A, in the course of rendering a
    service to B, damages C.
    Government regulation can be used to
    internalize external costs.
    Tax on External Costs
    Establishment of liability for external damages

    Critique of Pigou
    If we tax the polluter, and compensate the
    victim, this will encourage people to move
    into the neighborhood to receive
    compensation.
    In the absence of a Pigovian tax we have too
    much smoke and too few neighbors
    In the presence of a tax we have too little
    smoke and too many neighbors.

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