What Would Coase Say?
By David Henderson
Ronald Coase won the Nobel prize for, in part, what has become known as the Coase Theorem. According to this theorem, if people could bargain at low cost, there would be no problem of externalities and, indeed, the outcome would be the same no matter who had the rights. So, for example, if household A burns a fire that emits smoke and this smoke harms household B next door, then whether the smoke continues to be emitted doesn’t depend on whether household A has the right to emit smoke or household B has the right to prevent it. Why? Let’s say household A values burning at $100 and household B disvalues it, because of the smoke, at $120. Then, if household A has the right, household B, by paying more than $100 but less than $120, can persuade A not to burn. On the other hand, if household B has the right, A is not willing to pay more than $100 for permission to burn. At that price, B would say no.
Now to the messier reality. This last winter, our house smelled like an ashtray much of the time. Our neighbors upwind insisted on burning. We told them of the discomfort we felt and, while the lady of the household was sympathetic, the adult sons were not and, at one point, one of them got quite nasty when I tried to press the point. I even offered to pay $50 a month for every month they didn’t burn. The lady of the household returned the check uncashed. You might say that I didn’t offer enough. I sensed, though, that that wasn’t it. (There’s a lot more to say, but I don’t want to tell too long a story.)
We had always had good relations with our neighbors except for some bumpy moments involving the adult sons over the years. Both my wife and I have trouble holding grudges: it takes emotional energy–as Milton Friedman once said, it makes you pay twice. So we decided that even though we weren’t getting what we wanted, we would not hold a grudge.
One day, my wife made banana bread and took half of it next door. The lady of the house was delighted. Then we noticed something else: the frequency of the fires went from almost every day, which had been driving us wild, to about once a week or less. Shortly after, one of the sons, out mowing his lawn, waved and smiled at my wife as she was pulling out of the driveway. She was so shocked that she almost sideswiped our house. I thought we were on to something, so the next time I made my brownies full of chocolate chips, I took half of them over. A few days after that, one of the sons brought over some cantaloupes. Then about a month ago, I took over some brownies. Then Sunday evening, one of the sons brought over some home-grown tomatoes and onions. Summer in Pacific Grove, where I live, is almost as cold as winter. Yet they have hardly burned a fire at all.
Here’s my prediction: no matter how cold it is this winter, they will burn their fire a lot less this winter than last winter.