Attention Conservation Notice: When you have to do the work of complying with environmental norms, it’s a lot less fun than it looks, and Ronald Coase’s papers seldom contained the mathematical flouncing found in contemporary economics: they just contained really big ideas. He died yesterday, after a long and productive life.
Those of you who read regularly will note that I have read and studied fairly extensively in economics for somebody who is not an economist. Ronald Coase’s most well-known theorem is one of the greatest modern innovations to the field, but it’s an irritating theorem in many ways. To understand why requires a little background. Most people have heard of externalities; that is, there may be some cost or benefit associated with a good that doesn’t get captured in the market price because either a) the buyer doesn’t receive the benefit, so is not willing to pay for it or b) the buyer doesn’t have to contend with the external cost, and thus, doesn’t consider it when they decide how much of something they opt to consume. The classic example all young planners learn is consuming gas while driving a car: driving a car has lots of individual benefits, including fast, point-to-point travel, but it also burns gas that causes air pollution…whose cost is felt by the people who get sick from it, not by the driver, per se. Yes, individual drivers have to breathe bad air, too, but that is a low marginal cost to them because they are one of millions of drivers compared to the direct out-of-pocket costs of buying gas. With a consumption externality like this, individuals consume more of a good than is socially optimal or efficient.
Economics gives us two major policy approaches to get to an efficient outcome–i.e, lower overall consumption. The first comes from an economist named Arthur Pigou, who was among the first to note externalities. You could, in theory, apply a marginal tax equal to cost of the externality on each unit of the good so that the market-clearing price would result in the socially optimal level of consumption. You could do the same with production externalities, like the use of toxic chemicals in dry cleaning service. The problem is information: to know the proper tax level, you have to know how much the externality costs, and you have to know at least a little bit about the marginal utility of a consumer in one instance, or the marginal cost structure of a firm in the instance of a production externality.
Ronald Coase, much later, noted that you could also arrive an efficient result with a socially optimal level of production if we put the shoe on the other foot–that is, the rest of us, if we are bothered by the externality pay the producer to produce less (or the consumer to consume less). Lefties tend not to like Coase much because it feels like expecting the victims to pay to reduce an activity (pollution) to which there is no real entitlement. However, Coase’s theory has been a major innovation in policy as it has made it possible to create cap and trade systems. While many people deplore cap and trade systems, the systems do eliminate a lot of the information problems you have with a Pigouvian tax. Instead of having to figure out how much to tax and trying to suss marginal utility and marginal cost curves, the participants in cap and trade systems know their own utility and their own cost structures and know when it’s to their advantage to trade or not. The government only has to set the level of activity it will tolerate, how it’s going to endow rights at the beginning, and then let people trade to the target level. And people still have an incentive to innovate cleaner technologies so than they can sell more in the pollution market or save money by having to purchase less in the market. The very good idea of paying people not to burn down the Amazonian rain forest comes directly from Coase.
This is a rough explanation, and I have students who could explain it better, but you get the idea.
So I have always been sympathetic to the argument that paying producers to back off is a morally hazy endeavor. For one, the secondary incentive structure strikes me as wrong: if I am paid not to pollute, I have little reason to innovate new production technology than if I pay per unit of pollution, though those of us paying people not to pollute have a reason to innovate. But those polluting may not have an incentive to adopt once we’ve innovated. There are other reasons, but you will have to read Chapter 6 in my book if you want to see them. 🙂 (Which means I have to write it so you can read it.) Again, I’m not referring to auction and trade systems because those keep the incentive structure intact.
However, I am starting to feel for Coase and producers. My neighbors across the way are super-duper environmentally correct people. They drive a Pious. Of course, they also have gardeners. I have a little Miracle Gro that I use on my roses in the front. Miracle Gro has been around a long time, and while I wish they were still owned by Sterne’s instead of Mansanto, nobody is eating roses, I don’t use a heavy solution, and from what I can tell, there is no diminishment of bugs, bees, butterflies, or anything else, and the feral cat is not dying from anything. Well, suffice it to say these neighbors stare and glare and make drama when/if I use the little garden sprayer, even though, having given in to their passive-aggressive dramatics (given that their gardeners are spraying crap all over when these two are at work), I now just use the Miracle Gro spray thing and fill it with soil soup (compost tea) I make myself–but I still the use the Miracle Gro spray thingie because it fits right on the end of the hose and I can mix the soil soup with water and dilute and spread more easily.
Miracle Gro was inexpensive and extremely effective for roses. My New Organic Plan, undertaken several months ago out of deference to my own guilt about environmental things combined with their furious glares and pulling their dog away from the yard like he will die instantaneously, is an expensive, dirty, smelly, insect-y pain in my butt, to put it indelicately. Organic gardening websites boast of pounds and pounds of beautiful compost one gets from one’s worm composter. Well, I don’t know what those little bastard worms are doing in there all day, but it takes me months and months to get about a Folger’s coffee can of compost. Five gallons of poop tea takes days to make and I can’t make enough at one time to cover the entire rose garden, unless I spend about $400 on a D-Lux compost soup maker thingie. My easy application of not-messy granules of Miracle Gro now consists of endless mucking about with compost and organic soul re-conditioners: One first applies four treatments of PENETRATE (which involves mixing and spraying; hence my retention of the little Miracle Grow nozzle thingie), and then one must OPTIMIZE the soil; then MAXIMIZE, Then NOURISH.
I have never used pesticides, but after a morning of flailing around my garden with a badminton racquet trying to kill off the Japanese beetles that are playing hell with my roses, I’M THINKING ABOUT IT.
I’m trying to write a book and have a rose garden, not becomes the world’s foremost leading expert on nematodes. I certainly wish them well, but honestly, this whole production is heinously expensive: the PENETRATE; OPTIMIZE: MAXIMIZE; NOURISH stuff cost me nearly $150 for my whole yard, and then there’s the $80 I spent on an organic blood and bone stuff. So yeah, I’m kind of feeling that since I seem to be paying out the nose in terms of dollars and time to satisfy somebody ELSE’S preferences, it would be okay if they paid me.
Farewell, Dr. Coase.