From the inbox:
I wanted to point you toward our most recent blog post, discussing the Coase theorem (state that under free-marketing conditions, society will arrive at its optimum level of pollution) and the reasons it’s inapplicable to real life.
Here’s the post:http://daily.sightline.org/daily_score/archive/2011/02/21/the-coase-isnt-clearThought you might be interested to see it.
At the risk of giving attention to someone just seeking attention*: you have my attention.
From the post:
But unfortunately, free-market sincerity only goes so far: it's possible to be perfectly sincere and also deeply misguided. And, in fact, that's the conclusion that this article in the Journal of Economic Issues reaches. The authors, Robin Hahnel and Portland-based Kristen Sheeran, have constructed a convincing case that the key intellectual pillar of free-market environmentalism -- a bit of theoretical economics known as the Coase theorem -- has almost no relevance to how pollution markets would play out in the real world.
Some disclosures: I haven't fully read the JEI article. I'm not critiquing the article (although I do wonder why, if the article is a thorough dismantling of a Nobel Prize winning argument as the blogger claims, it landed at the 110th ranked journal**?). I'm commenting on the summary of the article by a blogger whose Communications Associate sent me an e-mail.
With that--No relevance?
Now you really have my attention.
So what's this Coase theorem thing all about?
In a nutshell, Nobel-winning economist Ronald Coase proved mathematically that, with a system of guaranteed pollution property rights and under ideal "free-market" conditions, society as a whole would get exactly the amount of pollution that its members want -- no more and no less.
OK, I'll stop there. Coase didn't prove anything mathematically. Here's a link to the 1960 paper that contains the underpinnings. Scan it real quick. No math--other than a contrived numerical example to illustrate the argument. Coase made a compelling argument in a legal context about bilateral bargaining over property rights.
The power of Coase's argument is that it allowed economists to focus attention on issues that weren't previously thought about rigorously: the conditions under which bargaining will or will not work to achieve the economically efficient allocation of an externality. No more and no less.
Markets are bargaining sutuations. Free markets are a specific type of bargaining situation. Insights from Coase's arguments are pivotal in understanding when the market framework can be used in the presence of ill-defined property rights. As Hahnel and Sheeran conclude:
Hopefully, this article helps demonstrate why the realm of real world situations where voluntary negotiations could be reasonably expected to provide efficient solutions to environmental problems is so small that free market environmentalism no more deserves a seat at the policy table than miracles deserve a role in the operating room.
Note that Hahnel and Sheeran are not claiming that the market framework cannot be used to solve environmental problems. Rather, they seem to be pointing out, that the textbook definitions of the Coase Theorem, as bastardized by free-market environmentalism nut jobs, lose the spirit of Coase's intentions. As Coase himself has argued on may occasions, the Coase Theroem doesn't imply that we should just step aside and watch uninhibited markets solve all the world's problems.
There is an important role for markets and market principles in solving environmental problems. Understanding the conditions under which markets will and won't be useful provides a critical link between theory and real world***.
That's the beauty of Coase.
*John and I get multiple e-mails a week from communications specialists pointing us to stories we 'might be interested in.'
**I realize that may come off as elitist. Not my intent. I've published at far lower ranked journals--and the papers landed where they deserved to be. That's what makes me wonder.
***Here are some more of my thoughts on the Coase Theorem. As if you're interested in what I think.
