Defending the Coase Thereom, Attacking Externality Justification for Intrusion

Quote 1: “The motivation for this international gathering was increasing concern over the problem of global warming.” Gruber, Jonathan (2012-12-01). Public Finance and Public Policy (Page 121). Worth Publishers. Kindle Edition.

  • The text frequently refers to global warming as a problem without demonstrating that it is. In fact, he says it would be a good thing for those living in North Dakota. According to David Friedman, a Physicist, Economist, and Professor of Law, as well as the son of Milton Friedman, it is not clear that global warming is a negative externality. Carbon emissions have been referred to by some agricultural scientists as carbon fertilization due to their benefits to crop yields. Again, by Friedman’s calculations, the amount of land across the world which would be made more habitable and comfortable from a growth in heat far outweighs the potential marginal loss along some coastlines. More information is available in these two sources:
    • https://www.youtube.com/watch?v=D7pKldlZNqQ
    • http://daviddfriedman.blogspot.com/2011/09/what-is-wrong-with-global-warming.html

Quote 2: “Externalities are a classic example of the type of market failures discussed in Chapter 1. Recall that the most important of our four questions of public finance is when is it appropriate for the government to intervene? As we show in this chapter, externalities present a classic justification for government
intervention.” Gruber, Jonathan (2012-12-01). Public Finance and Public Policy (Page 123). Worth Publishers. Kindle Edition.

  • We didn’t comment on Chapter 1, so I’ll object to this now. The YouTube link cited for Quote 1 also applies here. In that talk David Friedman directly criticizes the idea that externalities constitute a market failure, around the 9 minute mark. A primary issue is that externality arguments are based on an arbitrary choice of who the victim is. For example, a pollutor might pollute and therefore reduce the value of a home downstream. The home downstream could be called the cause of its own costs to a degree in that it chose to be built where this could occur. Social costs are really jointly produced, they are not external. This is called the Coase theorem and it implies that externalities are actually almost always priced into transactions on an otherwise properly functioning market. Coase is discussed at length in the reading as well. He also taught at the University of Virginia for a while.
    • http://en.wikipedia.org/w/index.php?title=Coase_theorem&oldid=624110579
  • Milton Friedman is well known for criticizing the idea that a market failure justifies government intervention on the simple grounds that government failure occurs just as often and perhaps more often. If a market failure is defined as a failure to exhaust all possible gains to trade, then the market has not really failed at all when the alternative is a government intervention which would provide no additional gains to trade.
    • https://www.youtube.com/watch?v=Moc7gwMJabM
  • Lastly, voluntary associations and clubs can act in the same way that government does to account for externalities, but can do so in superior fashion due to the preservation of voluntary, and therefore more efficient, action. Clubs can also geographically overlap, which creates competition among these policies and another motive for efficiency. David Friedman, again, is known for demonstrating the efficiency of law produced in a polycentric legal system. There is not a single public good which cannot be produced on the private market, either by firms or by clubs in the form of club goods. An example of a club good would be a lake which is owned by one or more clubs and members pay a fee to access that lake in a sustainable way which is managed by the club(s).
    • http://en.wikipedia.org/w/index.php?title=Club_good&oldid=612331230

Quote 3: “In many cases, it is impossible to assign blame for externalities to one specific entity. Assigning damage is another side to the assignment problem. We have assumed that the damage was a fixed dollar amount, $100. Where does this figure come from in practice? Can we trust the fishermen to tell us the right amount of damage that they suffer? It would be in their interest in any Coasian negotiation to overstate the damage in order to ensure the largest possible payment.” Gruber, Jonathan (2012-12-01). Public Finance and Public Policy (Page 132). Worth Publishers. Kindle Edition.

  • The author’s objections to the Coase Thereom fail misrebly, and in part he is flat out wrong. It is not in the interest of any Coasian negotiation to overstate, or understate, or perhaps even state at all, damages.
  • The Coase Theorem holds for multi-party situations. In fact, it is better at stakeholder representation than a well though out government policy due to the calculation difficulty of accurate representation. Government representation tends to be pluralistic and truncated where the real world is hyperpluralistic and infinite. At the logical extreme of stakeholder representation, every person is a stakeholder in every action of every other party, to varying degrees. It is easy for policymakers to assume away the small effects on those who are distantly impacted by actions, but these small effects add up over the globe. Markets don’t assume away. They account for everything.
  • The victim and offender need not even be identified in some grand way. All that needs to happen is for individuals to make up their own mind about what they want to do, and the market prices everything in. In fact, the point of the Coase Theorem is that there is no clear victim and offender! Costs are jointly produced.
  • The $100 figure comes from individual preference in practice, and it doesn’t matter whether it is fixed or variable. Individuals have varying preferences and the offender must pay off a sufficient number of them to maintain social order, or they will reject the offender for the same reason in the next point…
  • The fisherman doesn’t need to be honest, but yes we can expect that he will. This is for 3 reasons:
    • The first reason is that markets value reputation. If the fisherman lies then people won’t be upset when the ‘offending firm’ ignores his deceptive request for compensation. If he is honest, society will penalize the firm for lacking such compensation – with or without coercive public action.
    • The second, and related, reason is the discipline of constant dealings. When an actor faces a choice between a one time beneficial transaction and many, smaller gains over an extended period of time, it is often, perhaps counterintuitively in theory, ideal in practice for that actor to prefer the latter.
    • Finally, the fisherman doesn’t need to be honest. Economics is not about espoused values or claims or rhetoric, it is about action. Whether the fisherman is satisfied – really satisfied, not satisfied in language – will essentially be demonstrated de facto by whether he continues fishing there or not. If he leaves, the compensation wasn’t sufficient. If he stays, the reduced benefit plus compensation were sufficient.
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