Wow, I turn my head for a few minutes and things pile up. I'm learning rapidly why columnists take so much heat. It's almost impossible to fully explain complex concepts in simple language without leaving out details that can be attacked from many angles.
Anyway, my post yesterday about the Coase Theorem generated quite a discussion and I wanted to address some of them. Since the discussion went beyond the original eminent domain question I thought I would bring it into a new post. So here goes...
The Coase Theorem is not a theorem at all (Coase uses no math and never mentions a theorem). It is an argument that has taken on a lengthy life of it's own. In yesterday's post I gave the definition of the Coase Theorem that I've found works best in introductory environmental economics classes (for me): In the absence of transactions costs and impediments to bargaining the economically efficient outcome is independent of the assignment of property rights. As Robin Connor points out in her comment,
...the distribution of wealth in the outcome is different depending who gets allocated the rights.
Yep. My initial post was based solely on economic efficiency as the decision criterion. Under the conditions I set out, bargaining will result in the economically efficient outcome (that is, generate the biggest pie for society). How that pie is divided...well, that's another question that I'm sure will come up in later posts.
As Larry Eubanks points out in his comment, under the ideal set of conditions, the Coase Theorem is ridiculously simple "in a perfect world, things are perfect." So, when does the Coase Theorem break down? When there are transactions costs or impediments to bargaining. This is the real utility of Coase's arguments. He was able to identify the conditions for a bargaining solution to break down, allowing for the design of better institutions that mimic ideal bargaining outcomes.
This is where the tradeable permits markets come in. Prior to tradeable permit markets, the property right for clean air was implicitly assigned to society. That is, pollution is bad and society has the right to clean air (This was implicit in the original Clean Air Act). But, applying the Coase Theorem allows us to turn that around and assign the property right to polluters. Polluters have the right to pollute, as long as that right is transferable. Of course there are impediments to bargaining and transactions costs in a market this big, but the fundamentals of Coase still hold. It was a huge step forward for economic input into policy when economists were able to convince policy makers that it was OK to switch the assignment of property rights.
Finally, in response to Larry's point "I've thought it was better to discuss the Coase theorem in terms of liability assignments, and not in terms of property rights (I'm thinking it was in one of Alan Randall's books.) That is, either the polluter (full liability) or the pollutee (zero liability) could be liable for damages. "
I view this as a glass is half full-half empty argument (I have to be careful because Alan Randall is my department chair and he has to make raise recommendations soon. Don't want to ruffle the boss's feathers). If we assign property rights to the pollutee we are assigning liability to the polluter and vice versa. I'm not sure if this helps in convincing the public, but I don't think it makes much difference in the ultimate outcome in application. I'm sure I'm oversimplifying this.
