Russ Roberts

Robert Frank on Coase

EconTalk Episode with Robert Frank
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Robert Frank of Cornell University talks with EconTalk host Russ Roberts about the implications of Ronald Coase's views on externalities. Drawing on his book, The Darwin Economy, Frank explores the implications of Coase's perspective for assessing public policy challenges where one person's actions affect others. Examples discussed include pollution, cigarette smoking and related issues.

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0:33Intro. [Recording date: February 3, 2014.] Russ: Today we're going to talk about Ronald Coase and your discussion in The Darwin Economy of Coase. He passed away last year at the age of 102. He was a guest on EconTalk in 2012; and last year Don Boudreaux appeared here to discuss Coase's work. And I thought it would be interesting to do a similar conversation with you. And you have a very different philosophical perspective compared to Don or mine. We're going to focus on Coase's work on externalities--his 1959 piece, "The Federal Communications Commission" in the Journal of Law and Economics and his 1960 piece in that same journal, The Problem of Social Cost. Bob, you point out that before Coase--and I just want to say to listeners: You may be wondering why we are doing another episode on the same topic. Besides the fact that Bob has a different perspective philosophically than my own, the other reason is that it's an incredibly deep and rich concept, the ideas that Coase put forward in these two pieces. To quote--Bob, you say, "Despite the incredible attention it has received, scholars still haven't grasped its full significance." I want to include myself in that group. I don't know about yourself. But I thought it's very worthwhile to come at it another time. Guest: Yeah, there's a lot there; and none of us has really plumbed the full depth of it. It's amazing. I think some of the interpretations that persist of his work out there just don't seem at all consistent with what we know about his beliefs and writings on other topics. Russ: And I hope we'll be able to shed some light on that. Bob, you point out that before Coase there was a tendency to look at negative externalities, that is, cases where one person's actions cause harm to another--that's what a negative externality is. So, my action doesn't just affect me in its costs and benefits, but people besides myself. A lot of people tended, and still do tend to look at those kind of situations as there being a perpetrator and a victim. But that's not Coase's perspective. Explain. Guest: Not at all. In fact, that's the chapter title I chose for the discussion of Coase in my book--"Perpetrators and Victims". There was a bad guy and a victim in each of these cases. Coase's famous example in the "Federal Communications Commission" article published in 1959 involved a doctor and a confectioner, a candy-maker. The confectioner was first on the scene. He had machinery that made candy in his orders. The doctor opened an office in the same building. They co-existed without incident for many years. Then the doctor built a new examination room adjacent to the candy maker's machinery, and he found that the vibrations and noise prevented him from doing his work properly. And so he sought a court injunction trying to prevent the confectioner from making the noise that was interfering with his work. And in fact he prevailed in the court decision. Coase said: Wait a minute; where did the presumption come from that the doctor has the right to a noise-free environment? It does seem that the confectioner is harming the doctor; that's clear enough. But what if we tell the confectioner, no, you can't do what you are doing? Then we're harming him. So, no matter whether you turn left or you turn right in a case like that you are going to cause harm. Coase's insight, and I think it's the real, enduring insight he had, was that it's in the interests of both parties, the doctor and the confectioner, to solve this mutual problem that they have, namely that their two activities aren't compatible fully with one another, to solve that problem in the least costly way. Any other way of proceeding would leave open the possibility of making both parties better off. So, who is the guilty party? That's the wrong question to ask. The question is how can this problem be solved in the cheapest way? And there, Coase saw that the law made no difference if they could talk to each other. And that's what I think the people who don't like government regulation in general saw as an idea to celebrate: Look, if the doctor could talk to the confectioner then they could reach an agreement even if the confectioner were not held liable for the noise damage. If it were cheaper for the confectioner to solve the problem, say by putting sound-proofing on his machine, than it would be for the doctor to move to a new location, if that were the best option for him, then the doctor could pay the confectioner to install the sound-proofing. If it were cheaper for the doctor to move, then the doctor could move. So without any attempt for the government to get involved, the problem would be resolved efficiently--that is to say, the cheapest solution would be adopted by the two parties. Russ: When you say, the doctor could move--he'd want to move, because that's cheaper than bribing the candy maker to put up more sound-proofing. In that case. Guest: Yes. If the government doesn't intervene, if they tell people you can do whatever you want, then the confectioner doesn't have to install soundproofing. If it's cheaper for him to install soundproofing than for the doctor to move, then the doctor would find it in his interest to pay the confectioner to install soundproofing. He would do that because the alternative would be to incur even greater costs by moving. If it were cheaper to move than to have the confectioner install soundproofing, then the doctor would just move. Either way we would get the cheapest solution, which is the one we want. So, I think people seized on that example to say, Oh, look; here's an externality and people can resolve it efficiently all by themselves. It doesn't matter whether the government has a noise regulation; we can do quite nicely without that. Russ: If you come to that conclusion, it means you didn't read the rest of the article. Guest: That's right. Russ: So, carry on. Guest: So, Coase was very clear in his piece, and if you read the broader context of his earlier work it's even more clear, that he did not believe that in general people could reach easy solutions through private negotiation about such problems. His very first work conducted when he was a young man on a visit to the United States from England was a detailed study of why we have firms in the first place. Why don't we just do everything through individual contracts in the spot market? It's because all the contracts you'd have to write would be so cumbersome to negotiate that it's just much cheaper to have a firm organize them all internally and then give you a final product that you can buy. So he saw that negotiation was very impractical much of the time. And he sought to understand institutions, laws, social norms, all manner of institutional arrangements as attempts to economize on negotiation costs, making negotiation unnecessary. And what that means here is if you are thinking about how to define rights, who should have the right, the doctor to a quiet environment or the confectioner to make noise as he pleases? Well, you've just got to see what agreement they would have reached if they had been free to negotiate with one another, and then have the law try to set up property rights so as to steer them to that agreement. So in this interesting example that he offered, if it had been cheaper for the doctor to move and they can't negotiate, then having the confectioner not be liable for noise damage results in the efficient solution--the doctor would have every incentive just to move on his own and that's the cheapest solution. If the cheaper solution were for the confectioner to install soundproofing, however, then you would want to have the law say he's liable for damages because now it's not practical for the two to negotiate; the doctor can't bribe him to install soundproofing and he'd had to move as the best solution available to him. If the law makes the doctor [confectioner?--Econlib Ed.] liable for noise damage then he will install the soundproofing because it's cheaper to do that than to pay the damage that the noise would cost. So that's the Coase insight, I think in its simplest and most general form. Laws and regulations, property rights, all such things should be designed in such a way to mimic the agreements that free people would have reached in their own interest had negotiation been practical.
10:11Russ: Now, in the middle of that you mentioned the 'efficient' solution. You've also talked about the 'cheapest' solution to the problem. Let's have a small digression to the problem, because we may end up using it later, about what economists mean by efficiency. In everyday language efficiency means a variety of things. But economists have a very specific way of using that phrase. Guest: Yes. I think to an economist a situation is efficient if it results in the largest possible economic surplus. And economic surplus is itself a pretty simple concept, although not without controversy of its own. So, if I'd be willing to pay $100 for a radio and I can buy it for $20, then I get $80 of economic surplus by doing it. So if there is some way to rearrange things to make the total economic surplus bigger, then that situation can't be efficient. Russ: So, in this case-- Guest: And if you adopt the more expensive of the two ways of solving the noise problem, that's inefficient in that narrow sense. Russ: Yeah. You've wasted resources. The pie isn't as big as it otherwise might be. Guest: Right. Russ: And it's important to mention--and I'm sure we'll come back to this later--most, if not all discussions of efficiency tend to ignore who gets which pieces of the pie. How the surplus gets divided up. Which we also usually care about. Especially for the confectioner or the doctor. You care a lot about it. But if we think in the abstract about how to design what kind of world we want to live in, obviously efficiency is not going to be only thing we care about; and how much we care about it may differ across people; but there is certainly a virtue in not throwing away stuff. And inefficiency means basically you've lost something, you've wasted a chance. Guest: Right. If you've done something inefficiently then what that means is that there is at least in principle a way to rearrange things so that everybody gets more of what he cares about. Russ: In theory. Guest: That can't be a good thing to do. What would be the possible argument in favor of a situation where people have less of what they care about? Russ: Yeah. The proof of the pudding though is going to be how hard is it to make sure that it is practical to divide up the pie so that everybody share is at least as big as it was before. Guest: Right. Russ: So, just again, to make this clear; we are talking somewhat abstractly. If we have a policy change that leads to a greater surplus, that leads to a greater net output, greater production, greater value, we'd also care about whether your share of it gets larger or not. Right? We wouldn't necessarily like-- Guest: Whether you can reach agreement to do it is often going to depend critically on how individual shares will be affected. It's not just the total that matters to people. It's: How is my share going to change? The clearest example of that I think Russ is the arguments about free trade. Most economists agree that freer trade makes the surplus bigger. It may, however, make the surplus of certain parties smaller. So, in the classical example, capital gains, when you open the market to free trade and labor loses, at least in the American context. And so in principle if the surplus gets bigger it's possible for capital to put money into the pot and transfer it to labor in the form of tax credits or trade allowances and the like, and then everybody is better off. But if you don't do that, then labor is not irrational to vote against free trade. Good that it makes the pie bigger, but my slice is small. Russ: And the same would be true of technological change, and innovation, a topic we've been talking a lot about in the last few months here on EconTalk. Smarter machines are going to make us more productive as a society, but what that does to any one of us depends on a number of factors, in terms of how competitive our skills are with the machines and so on. I would just add that in my book, The Choice, having taught Trade for years and the efficiency arguments in favor of it, I ultimately decided they are not very satisfying. They matter, but I don't think that's the most important--the fact that trade makes the pie as big as it possibly can be is not a convincing argument for most people; and I'm not sure it should be. Economists tend to like it. I think the real reason economists like it is it's elegant. You show the areas in a graph; it's great for exam questions. And you sort of convince yourself--some people do--well, it makes the pie bigger; it's good. But you also care about what happens to a bunch of individuals, particularly poorer individuals, lower-skilled individuals. So to me it's ultimately--and this is a subject for another episode, but to me the argument in favor of free trade does not rest solely on efficiency.
15:15Russ: Let's move on. So, let's come back to the point that we started this little subsection with, which is the perpetrators and the victims. Now that we've laid out Coase's insight, why is this perpetrator-victim distinction unimportant in Coase's story? Guest: Well, because the perpetrator-victim framework just presumes, without explaining why, that it's the confectioner's fault here. He's the one making the noise; it's the doctor who is suffering from the noise. But Coase's insight was that the doctor's presence on the scene caused for it--the confectioner's noise wouldn't have been a problem but for the presence of the doctor trying to do work that was incompatible with noise. So, why should one concern be elevated above the other? I mean, if the doctor had gotten there first and had made expensive investments on the basis of a presumption that there would be continued quiet and then that was disturbed, that would be one thing. But there was no indication of that being part of the initial situation. If the doctor was poor and the factory-owner was rich, could easily afford the cost of the noise-abatement equipment, that might have been a consideration. There was nothing like that introduced into the example. So you have to explain why one interest should predominate over the other. Why is the doctor's claim to quiet more important than the confectioner's claim to a low-cost production method? Which presumably the noisy one would be compared to a quiet one. Russ: And your wording is that--and it's mine as well; maybe it's in Coase--all externalities are essentially reciprocal, would be the more productive way, more useful way to think about it. Instead of a victim and a perpetrator, the phrase I like to use is, It takes two to tango. So, when you have these kind of externalities, it's better to think of them in a more abstract way, as two people who are tangled up with each other, not one whose fault it is. And the more you think about these kind of problems, you start seeing them in a lot of places. And we'll be talking about some of them. You start thinking about second-hand smoke. Whatever your tastes are in movies or reading might offend me. Your actions--it goes way beyond confectioners and doctors. It deals with pollution. It deals with charity on the positive side. All kinds of places where externalities come into our lives. Now, the Left did not like the Coase theorem. And neither did the Libertarians in certain dimensions. What was the Left's critique of Coase's insights? Guest: Oh, I think many on the Left thought it was tone-deaf to a lot of basic moral intuitions. 'Well, of course, the confectioner is the guilty party here; he's the one making the noise.' But Coase, I think correctly described that as question-begging: Why is he the presumed guilty party? We have to reach a judgment about what's the right thing to do here. And the right thing to do when viewed from the perspective of each of the two actors is to adopt the cheaper solution. And if that's the solution that has the doctor move rather than the confectioner install soundproofing, they would both want that to be the solution offered. Because failure to do that would mean they could slice the pie up another way so that they'd both be better off if they did it, with the cheaper solution. So the cheaper solution is in a very profound sense the right solution. So when people say Coase offended their moral intuitions, well, maybe their moral intuitions didn't lead them correctly to identify the right solution in this case. Russ: I side with the Left on this partially, and we'll come back to this later. I think in this particular case of the candy maker and the doctor, most people would agree that there is nothing immoral about making candy. It's true it looks like there is the harmer, the person causing the harm, is the candy maker. But I disagree with the Left in this situation. I don't think there is anything immoral about making candy. Guest: The real objection of the Left, of course, was that this seemed to open the door for claims that government regulation of externalities isn't really necessary. That was, I think, the real wellspring of criticism of Coase's piece from the Left. Russ: And the libertarians had a similar confirmation bias problem. Why don't you explain that? Guest: You know, if you are a libertarian, you don't want to be interfered with. You want to do what you want to do. And if what you want to do causes harm to others, are you eager to embrace a framework that would say it might be the best thing to do to regulate to keep you from doing that? I think that's an unhappy pill for a libertarian to swallow. So what I see as a practical matter is that libertarians will invoke John Stuart Mill's harm principle. Mill, you'll recall, wrote in On Liberty that the only reason the government can restrict somebody's liberty of action is to prevent harm to others. By which he meant of course undue harm to others. And libertarians are fine with, say, well, yeah, the law can prohibit me from stealing my neighbor's bicycle or from hitting him over the head with a baseball bat; I can't harm him; I have no problem with that. But when it comes to other, more subtle, indirect forms of harm, I think the libertarians' impulse is to say: I have a right to do what I want to do and that trumps somebody else's objection that it's causing me harm. So I think the libertarian framework is kind of a deontological framework. In philosophical terms, they say there are just certain rights and principles that you can't violate no matter what the underlying costs and benefits say. And Coase's framework is very thoroughgoingly consequentialist. The right thing to do is the thing that has the greatest economic surplus, the greatest balance of benefits over costs. And so if someone can show in Coase's framework that the benefit of regulation to those who gain from it outweighs the cost to those who are restricted by it, then it's a good regulation. And libertarians don't find that a congenial message. But I think if you are a true John Stuart Mill libertarian, government can't restrict me except to prevent undue harm to others, then you've got to buy into that. It's very hard to oppose philosophically the claim that the right set of laws is the one that mimics the agreements that free people would have reached had it been possible for them to negotiate with one another.
22:35Russ: Now, I may disagree with some of that. Guest: I'd be eager to see some examples of that, that you wouldn't buy into. Russ: But, having said that, I think--could you just restate for the non-philosophical among us the distinction, because it's a phrase we might want to use again, the difference between deontological and consequentialist. Guest: The deontologist, the school of moral philosophy by that name, they say that there are certain principles that have to be followed irrespective of the surrounding costs and benefits. And they'll admit that costs and benefits matter, that they are also to be considered. But there are certain bedrock principles you have to follow even when the cost-benefit seems to point in the other direction. The consequentialist, by contrast, they say that the right thing to do is the thing that produces the best overall consequences. That's where the tough part comes in, is how you measure consequences. But in cost-benefit terms, in econo-speak, it would be the option that produces the greatest economic surplus, the greatest surplus of benefit over cost. Russ: So, while both of us are fans of Coase--and I don't know which of us likes him more--you also mention in your book that deontological issues are inevitable and matter to almost everybody. So, for example, you might not like when I am critical of some government policy you agree with, but you recognize that there's a virtue of free speech, and you put that above any of the cost-benefits that might accrue to, say, stopping me from being critical of some regulation. Correct? Guest: No, no. That would not be an example I would point to. Russ: It's in your chapter! Guest: I would say that free speech is very easily defended in consequentialist terms. There's enormous benefit from each of us being able to speak freely. I don't have to enumerate what the benefits are, but they are enormous. And yes, there is harm. You call me a 'fool.' That makes me feel bad. There's harm to me from free speech. But if we try to write a law that would micromanage the speech of individuals and filter out the harmful speech and let the good stuff through, it would be a fool's errand, really. You could never hope to fine tune it in that way. So we just say, except in extreme cases, you can say whatever you want. You can't yell 'fire' in a crowded theater--there are limits. But no, the defense of broad free speech rights is a thoroughgoingly consequentialist notion. You could say that the deontologists are on board with that, too; and of course they are. And interestingly, the deontologists reach exactly the same conclusions as the consequentialists in 99% of the cases. Russ: Well, Bob, it sounds like you are calling me a fool, now. But I would never call you a fool. I did misinterpret, evidently, the example in your book, and I apologize. It does show you how these concepts tend to bleed together, I think. Guest: Right. Russ: Let's take a different example from your book, which I will not interpret. Only you interpret. There's a classic case of--the setting you use is a botanist wanders into a jungle village and is told if he will shoot one person, they'll spare another nine. Is that a good example? Guest: That's one that's often used to illustrate the purported moral blindness of consequentialism. The consequentialist is supposed to say, when confronted with that example, that, well, I guess it's better than one person die than that all 10 die. So you should shoot the innocent victim. The deontologists say no, you just can't go there; to kill is wrong and you don't do that. You can construct very complicated consequentialist arguments that would get you to the same spot, but it's meant to be a case that illustrates the moral blindness of consequentialism. Russ: Do you have a case that illustrates the moral blindness--I guess by definition it's hard to illustrate the moral blindness of deontology. Guest: Yeah. I think a creative consequentialist--there's broad latitude when you think in cost-benefit terms to come up with plausible ways of measuring costs and benefits, so that you could say the thing that we all believe is morally wrong--is in fact producing bad consequences overall. This is an aside really to our main topic, but the question has always been interesting to me: Why is it deontologists feel so contemptuous of the cost-benefit analysts, of the consequentialists? And I think it's because there's such flexibility in making cost-benefit estimates that if you are a person trying to decide what to do--can I do this thing that I want to do if it's going to cause harm to others, that's a classical moral question--you are the person making the estimates of the relevant costs and benefits, and there's usually enough wiggle room in the material we have to work with that you'll figure out a way to say, Yeah, it's okay to do this thing I want to do. So, I think there may be an implicit belief that if you are a consequentialist, you can't really be trusted. Russ: I'm sympathetic to that worry. Guest: And I think--yeah, it's not that deontologists don't find ways to justify and rationalize. They do, too. But I think it's easier to do that if you are a consequentialist. Russ: How does this tie in with utilitarianism? Guest: Well, utilitarianism is one form of consequentialism. It says the best action is the one that results in the highest aggregate utility. The more general form of consequentialism I favor is economic surplus maximization--we don't try to add utility across people; we just take the economic surplus results and figure out how to make that as big as possible. Russ: But that's trickier than it sounds. And we'll talk about that in a second.
29:16Russ: Before we do, I want to get to your example of interracial hand-holding. Talk about how that example plays out in your chapter. Guest: Well, I use that as an example to take up the supposed moral tone-deafness of consequentialism. So, here's the example. You've got an interracial couple in Atlanta in the 1960s and they want to hold hands when they walk downtown to go shopping. It's a mostly white city; mostly the whites who would see them holding hands would be upset at the sight of it. And each would be willing to pay some amount to avoid the sight of it. You can imagine that the couple themselves want to hold hands and would be willing to pay quite a bit more, each of them, for the right to hold hands; but there are so many more white people who are offended, each willing to pay a small amount, that the total amount of offense caused by the sight of them holding hands would be greater than the amount they'd be willing to pay for the right to do it. And doesn't Coase then seem to say that, well, the right thing to do then is to say they can't hold hands? Russ: Because they can't--because it's too hard to negotiate to get these hundreds of people-- Guest: Well, even if they could negotiate, the outcome would be that they couldn't hold hands, because the white people would pool their funds and compensate them for the injury they felt by not holding hands. Russ: My point though is that because it is costly for all the white people to get together and come to that position, decide who contributes how much, it's better-- Guest: Right, then the rule should be you can't hold hands-- Russ: it's just against the law. Guest: Yeah. Now, I think--I hope all your listeners would agree: That's morally tone-deaf. Russ: I can only speak for myself, and I agree with you. Guest: Let's say, argue [?], that most of your listeners would say well that's obviously a morally tone-deaf position to take. Coase would not take that position. I think if you want to think about Coase, he would say, Look, we need realistic estimates of the various injuries and gains involved here. Seeing people hold hands causes injury to white people in the deep South in the 1960s--okay, I was a college student in the deep South during that time; that sounds accurate to me, and I'll take as given the assumptions of the example, that offense to white people in the aggregate, even though not big for any individual, would have outweighed the gains from holding hands to the interracial couple. But you have to ask: What if the law said you could hold hands? How would things evolve in that context? And here I can report, from the fact that I've been living in the North; I've raised four sons in Ithaca, New York. There are numerous interracial couples who live within a block of our house. They see interracial couples holding hands, raising kids together, and experience no affective reaction whatsoever. That's in fact a known consequence of humans in such environments. They adapt without any difficulty. And so if you said, Which way should the law be formulated, how will the relevant costs and benefits play out in the future, I think it would have been clear to anybody who posed the question that way that the injury suffered by a couple who was told you can't hold hands--well, they are not going to adapt to that. You are forever singled out as being different. You don't have the rights that other people have. They are going to experience that injury; it may even intensify over time. But the people who were ruled against by the law that said you could hold hands, they adapt. They avert their eyes at first; maybe they get used to it. There's no lasting injury to them. And so I think a pure cost-benefit analysis favors a hands-off approach in that case. Russ: So to speak as a [?]. Guest: Or rather, hands-on approach. Russ: Yeah. It's a bit of a stretch for me. I have to say. I'm going to take you in a different direction. My first thought is: I really don't care what the cost-benefit is. I just think a person should have the right to hold the hand of the person next to them. I'm happy to let some social norms evolve. There was never a law, I think, against hand-holding--it certainly wasn't enforced. But over time whatever norms there were against it, they sort of eroded and went away, as you point out, in the North and in the South. But I would want to make a distinction, and maybe it's not an important one, but it seems to be one for me. I want to make a distinction between psychic harm and physical harm. So, the example you gave, for better or for worse, is slightly complicated by the fact that it's psychic harm. And a lot of--for reasons, again-- Guest: In both cases, both the ostensible perpetrator and for the victim. Russ: Correct. And I think in this case--one of the problems I have with it is probably consequentialist in some degree, which is: I think it's hard to measure psychic harm; it's hard to be honest about psychic harm. So to me that's sort of a Pandora's box. Once you start saying that you are allowed to invoke things that annoy you--I don't think that's a good road for a society to go down. I want to give you a physical harm example that I've written about at the Library of Economics and Liberty, and get your reaction to it. Which I think really brings out the moral issue as well. Should you be allowed to steal somebody's car radio? Most of us would say no, you shouldn't be allowed to steal somebody's car radio. It should be against the law. We could debate how many resources, how many policemen, how big the police force should be on the street to deter theft, etc. To use Coase--and he may or may not have liked this application. But the way I use Coase to think about it is, well, Coase would say, What's the cheapest way to get people to not steal other people's radios? It's immoral to steal somebody's radio. There's nothing reciprocal about it. It's not voluntary. It's a physical harm that's measurable. We might not be able to measure the size of the harm, but we have a pretty good dollar measure of the cost to replace it. So the cheapest way to reduce radio theft might be to not make it be illegal. You'd say: That's impossible; it can't--that could never be the case. And I would make the claim; and I have I think some empirical evidence for it, that actually owners of radios prefer a world where it's legal to steal somebody's radio. And the answer is, your point in a different context. Which is that over time, radio-makers, manufacturers, car manufacturers, will find ways to make it useless to steal the radio. And that's likely cheaper--in fact, I'm very confident that it's cheaper than the costs of policing the streets and making sure you lock your car. So the way that world evolved, is that at first, you removed your radio from the car. The car had this innovation that if you left your car on the streets of Boston--because that was a place where the law clearly wasn't very well enforced--you pulled your radio out of the car and you went shopping. [?] in New York City. You'd walk around with your car radio. It had a tape player, it was expensive. And a lot of people found if they didn't do that, their cars were broken into. But ultimately the car makers figured out a way to make a radio that didn't work outside the car. They solved the problem. It was very cheap. It wasn't free; they had to develop resources to do it, etc. But I do think your insight that you have to look at how it plays out over time is crucial. Guest: Right. So, I'm not sure where you come down on that example. Do you think it was a good thing that we in effect declared it legal to steal car radios? Russ: Yeah. I'm a deontologist--I find my sympathies towards the deontology, right? I don't like utilitarianism. It gives me the creeps. And yet, in this case, I have to concede--and I learned this from Coase--that taking a consequentialist approach is pretty appealing.
37:53Guest: See, I think I'm with you all the way on the importance of moral judgments and how critically important they are for keeping behavior within reasonable bounds in society. All that is true. And it's not in search of a consequentialist explanation. There are good consequentialist explanations for why groups that have moral norms and strong feelings about them prosper in competition against groups that are less inclined. So, I think nobody would really want to live in a society where property was free to be stolen under the law. That's just a bad society to live in. And if you say, all right, car radios are fair game, as a practical matter, does that bleed into other forms of property? Can you really maintain a sense of moral indignation about theft if theft is permissible in some cases but not in others? Yeah, I think all that is easy to justify the idea of a moral norm against theft. We don't really need to go deep into deontology to get that. It's a purely practical kind of prohibition. Russ: But do you think it was--I'll ask it a different way. For decades, in major American cities, maybe not all of them, there were very few negative consequences to stealing a radio. It may have been illegal on the books, but it was not really enforced. Or it was too expensive to enforce. And I think Coase's insight, which is fabulous, is that this seems horrifying; but actually, it turned out pretty well. Guest: If it's too expensive to enforce it, that's a completely separate phenomenon. Then you are using consequentialist arguments for saying the optimal level of enforcement is going to be one that results in a lot of theft. And you adjust as best you can to that reality. And that's what people did, in fact. Russ: But my claim-- Guest: Coase is there. Russ: But my claim is that if you put the car owners in the room--and the car owners are not just car owners. They are also taxpayers and people who walk on the street and have to deal with crime, etc., and you said to them: You want to live in a world where it's okay to steal a radio or it's not okay? You'd think they'd say: I want to live in a world where it's not okay to steal a radio. It turns out, ultimately--I think the right answer to that, in a purely consequentialist approach, is: As a car-radio owner, I'd prefer to live in a world where it's okay to steal one, because that unleashes a set of incentives in response to theft that are cheaper than policing. Guest: Yeah, I'm going to disagree with you there, because I think there's a way to get everything you want without giving up anything. And that's to say: Look, I acknowledge that we don't have enough police to make it possible or practical to investigate thefts of car radios. That's just a practical problem we confront. Do we want to say it's okay to steal car radios? I would say No. Stealing car radios is against the law. If a cop is standing there and sees you do it, he will arrest you. We're not going to develop costly patrols to go around and catch car radio thieves because we've got other more important crimes to investigate. But we want to say it's immoral; we want to say it's illegal. And if motorists and car makers know that as a practical matter, nobody is enforcing it, they will produce the kind of private theft-deterrent strategies that you've described. And we get the outcome you and the car owners like as a second best. But we don't have to say it's okay to steal car radios. Russ: I didn't mean to be that provocative. I was trying to be provocative. I apologize. I was unclear. I just meant, we don't need to make it illegal. In fact-- Guest: [?] illegal. I think the law should say as a matter of principle that you shouldn't do that. Russ: I don't agree. I think it should be a moral principle. Guest: If we can't [?] you doing it, we'll punish you for doing it. Russ: But we don't. Guest: We would. Sure, if a cop was standing there and you stole my radio, of course he would-- Russ: I'm not so sure. You know, scalping is illegal in most American cities, of tickets. There are a lot of places you can make a scalping transaction in front of a policeman and they leave you alone. Guest: Well, there you can argue that it should be legal. Russ: I agree! As you'd expect. Guest: But I think it's much harder to argue that stealing a car radio should be legal. You don't want to go there, Russ. Russ: No, the semantic distinction I'm making is that it shouldn't be illegal. In the following sense. It should be immoral. We should tell our children not to do it; we should tell them it's wrong; we should inveigh against it when we have the chance. But if anyone who is listening, please feel free to write in the comments in this podcast episode, the time that you had your car radio stolen or your car broken into or your iPod stolen on the subway and you went to a policeman and said, Hey, my car radio was stolen. And they said: Yeah, what do you want me to do about it? It's not just that it's too expensive to staff the streets with enough police that they stop it. They are indifferent to it most of the time. Guest: Yeah, but that doesn't mean that they think it's legal. That doesn't mean they approve of it. It just means there's nothing they can do about it. Russ: Okay, fair enough.
43:27Russ: Now, to move to a more controversial example about this overtime phenomenon--I want to come to an example; I don't think you and I have talked about it, but that's the example of a carbon tax. A lot of economists have argued we should reduce carbon to reduce global warming. And I think the Coase perspective says: That might be a good idea, because obviously negotiation costs are enormous, and we all can't get together. It's just not going to happen. We have trouble doing it as nations around the world. We've failed in many, many attempts to restrict carbon because we have trouble breaking up the cost shares in a way that people are willing to accept these restrictions. And the alternative is to do nothing and to let people adapt to this higher temperature, the higher levels of carbon in the atmosphere. I think Coase would say it's an empirical question which way is the cheapest way to deal with it. Doesn't mean we can measure it. You can argue that it's a bad metric, it's a bad strategy because it's hard to measure. But I think Coase opens your thinking to that possibility. Guest: Yes. I quite agree. If you read the climate science literature, though, I think there's less ambiguity here than many believe. The science is inexact; that's the first thing that the climate scientists themselves will stress. They have no idea really where this is going exactly. What we know, though, is that every estimate that's come in has been dramatically more pessimistic than the one from a year ago. And the best simulation model that we have, the MIT Global Climate Simulation Model, in a recent set of simulations estimated that by the end of this century, by 2095, not even quite the end of the century, there is a 1 in 10 chance that we are going to see an increase of average global temperature by more than 12 degrees Fahrenheit. And if that happened, 1 in 10, the model is uncertain, so it could be 1 in 5, it could be 1 in 3, it could be 1 in 20--we don't know--but let's take their estimate at face value, 1 in 10, then we get 12 degrees increase. All the permafrost melts; all the methane, the billions of tons of methane are released into the atmosphere, each ton 50 times more powerful than CO2 as a greenhouse gas. That's essentially the end of life as we know it on the planet. So the question really has to be, if there is, say, a 1 in 10 chance that we are going to destroy our entire future, is there any price that we can afford to pay that would eliminate that possibility? And there I think the estimates are pretty clear that a carbon tax that wouldn't be that onerous to adjust to would essentially eliminate that disastrous possibility. Russ: Well, in that story, any carbon tax that doesn't reduce us to--well, any carbon tax is better than that. So, again, I think Coase gives you--again, I'm not making a point against a carbon tax. I'm making a point that Coase's insights gives you a way to think about this that is different than the standard ways that people think about, and it's provocative and interesting. What you've just said is that in your mind, the empirical evidence is overwhelming, that the lowest-cost solution to this problem is a carbon tax. Guest: Yes. Russ: I'm just raising the possibility that in other scenarios, maybe this one, the one we are living in right now, maybe the cheapest thing to do is to adapt. It's [?] not proven. Guest: And new evidence could lead me to endorse exactly that approach. Russ: But I think the contrasting view, the non-Coasean view, is either it's immoral to tamper with the earth's atmosphere and so we should always try to reduce the amount of our impact on the environment. It's a different view. It's a legitimate view. Guest: Right. Russ: It's the deontological view. Guest: Right. Russ: And I think there's a place where, again, I find myself relentlessly drawn to the Coasean side, even though in some cases--not this one necessarily, but in many cases--first I'm very uncomfortable. And Coase forces you to deal with your discomfort. Guest: Yeah. And that's a measure of the brilliance of his insight, that he just saw this in a clearer, different way than anyone that put it [?].
48:05Russ: Now, there's a big problem, though, with it. And you talk about it at some length. And that's the role of income. Let's talk about this challenge. And this cuts across not just Coase but of course arguments in favor of efficiency, cost-benefit analysis, what are typically called 'willingness to pay,' when we try to see, to aggregate benefits across people. So, I agree with most of what you say [?]; I disagree with a little of it. Lay it out. What's the issue of income? Guest: Okay. When we were talking about the confectioner and the doctor, income differences didn't have anything to say about what was the most efficient way to solve the problem. It was just: how much does the soundproofing cost? How much do you have to pay to the movers to get the doctor to a new location? Compare those two dollar amounts and you know what the right thing to do is. Think about another noise example--Sarah wants to play her violin late at night and her neighbor doesn't like it. She's poor, so she'd be willing to pay $5 for the right to play till midnight; he's really wealthy; he doesn't mind the sound of her violin much; it doesn't really disturb his sleep if he wants to sleep. Russ: He just doesn't like Mozart. Guest: But he'd be willing to pay $10,000 to avoid an occasional moment when he would be inconvenienced by it. So, should his view prevail? So people are offended at the idea that the fact that he has so much more money inflates his influence in the cost-benefit analysis. We take her benefit, which depends upon her meager income, therefore small, her benefits from playing late at night. The cost to him of playing late at night on a psychological meter would register almost imperceptible, but because he's so wealthy we get a big number there. That's the offensive part of cost-benefit analysis that causes people to object to its use. But if you really asked-- Russ: That's embedded in the Coase analysis. Guest: Yes. What agreement would they reach if they could negotiate with one another? Ask that question and then the cost-benefit analysis gives you exactly the answer to the question. She values playing late at night a lot in psychological terms perhaps but only a little in monetary terms because she is poor. That means he could pay her an amount that would more than compensate her for not playing at night. She'd be happier than before if he paid her that amount. He'd be happier than before to have paid it because he didn't like the noise, and he'd be free from it then. So everybody would be better off. That's why the solution identified by the Coase framework is the right solution. Now what if you can't implement it? What if you can't implement the transfer? Should you do it anyway? That's an interesting question. Usually, these are very small dollar amounts. My only claim is that we should use Coase and not worry about the transfers whenever it involves small-dollar amounts, just on the reasoning that you win some, you lose some; on average you come out way ahead. So, it's like somebody offers you a chance to flip a coin--heads you win $10, tails you lose $1. Well, I'll flip that coin a million times, if you want. Sure, I'll lose a dollar once in a while. But overall I'm better off taking that set of bets than not. And if we apply this Coase rule to a thousand different policy decisions, each one of which has a small effect on any individual's wellbeing, then you come out ahead whether you are rich or poor. Russ: It's a fascinating point, the point that--and I love the way you think about it. I've never heard it discussed that way. You want the policy, the assignment of liability or the assignment of property rights to mimic what they would do anyway. The problem I have with that is, as you point out, they don't make those side-payments necessarily after the fact. And that's Coase's point. Guest: Right. Russ: So, if you care about--I think you are pushed to argue that you should, in that case--here's the real problem, that you can't really legislate general legislation that is unaffected by these income differences. That is, not all violinists are poor and not all listeners are wealthy. But in this particular case, if I put that to the side, the generality challenge, if I care about these income differences, and if I think the negotiation-transfer problems are challenging, I'm pushed towards saying that she should have the right to play. If he wants to try to compensate her, great. She'll be better off. But that we should start by giving her the property right rather than him, because of this disparity. Guest: See, we don't do that, though. Russ: I agree. Guest: I mean, we say you can't honk your horn in front of a hospital at 2 o'clock in the afternoon. Why is that? Well, it's because there are people up there who have just had surgery who need to sleep; and the value to you of honking your horn is probably less than the value to them of the quiet that they'd have if you didn't honk it. You can honk your horn if you are a mile from the hospital. That's not a problem. But the noise ordinances really do try to ask what agreements the people would have reached if they could have negotiated with one another. Of course, it's not practical for a patient to run down and bribe a motorist not to honk his horn--I'm trying to rest. That's obviously absurd. So we say, all right, on average the motorists are going to suffer less if they can't honk here than the patients are going to suffer if we allow them to. So basically, if I'm a poor person and somebody says we should use cost-benefit analysis, what am I worried about? I'm worried about that, well, the standard argument is that it gives too much influence to the rich. And sometimes the rich want different things than the poor want. And so if that's the objection and there are thousands of different little decisions that are going to be affected, then we can solve that by saying: All right, we are going to tax the rich a little bit more and raise the Earned Income Tax Credit a little bit, and that will make up for the fact that we are using cost-benefit analysis now to decide how to do all these little policy questions instead of some other rule. Russ: I'm just making the point that I think this again brings out my deontological side. And I'm going to throw in a twist, which is: I'm tempted to say--my first thought is--social norms determine whether people play music at night, and those are probably the best way to deal with it. But a lot of times those norms don't work so well in these kind of settings. Does a person have a moral right to play the violin at 3 in the morning? No, probably not. Do they have the right to play Mozart at 2 in the afternoon even if you hate Mozart? I'd say absolutely yes. And I don't really care about the cost-benefit analysis because I'm worried about these income discrepancies that might-- Guest: Although I noted that what your intuition has told you is exactly what the Coasean analysis would have said. [more to come 55:29]

COMMENTS (52 to date)
Michael Barry writes:

Another great show. I wanted to throw out as a current example (or non-example) of inter-racial handholding the current litigation over Christian wedding service providers -- florists, wedding cake makers and photographers -- not wanting to provide services to gay weddings. With my personal libertarian bias I don't see why they (the service providers) should have to. It seems to me completely obvious, on a consequentialist view, that the easiest thing for the gay couple to do is to find a gay-friendly florist (for instance) instead of wanting to punish the non-gay-friendly one with a lawsuit. Is this a sort of radical misuse of the "regulatory system?" Or is it a question of deontology, where the "right" of a gay couple to marry has such a privileged status that the consequential tradeoffs -- which seem pretty extreme to me -- can be ignored?
What are the implications of this for other civil rights (e.g., an inter-racial wedding)?
All fwiw.

DougT writes:

On the question of car-radio theft in the '80s and '90s, it did seem that you folks were arguing about the difference between legalization and decriminalization. Is this a distinction without a difference?

It seems that this is the very distinction that people are now applying to recreational marijuana use. The deontologists seem to have prevailed for the present. Pot has been legalized in many jurisdictions, and has been federally decriminalized there as well.

We are now holding a large-scale drug-legalization experiment in several states. It remains to be seen what the consequences will be, and whether there will be enough data on adverse effects that anti-Pot consequentialists will be able to use to roll the legalization tide back.

Jonny Anomaly writes:

Always great to hear Robert Frank and Russ Roberts interact. There are two things Coase and Frank seem morally blind to:

1. Not all of our moral intuitions are utilitarian, and if this is true, it is not the "obviously correct" answer (as Coase and Frank put it) for states to intervene or refrain from intervening whenever doing so would maximize net social benefits.

2. Most of us reject, on moral grounds, the idea from Coase that "all externalities are reciprocal." This is because there is a deep distinction between causal responsibility and moral responsibility. While it's true that if my face wasn't in the path of your fist, I wouldn't have a black eye, it's also true that if your angry fist struck my innocent face, you're at fault, and we don't share the responsibility. This remains true even if the enjoyment you got from punching me exceeds the disutility I experienced from being punched. Sometimes you really are at fault for harming, sometimes you're not, and sometimes it's indeterminate. We should distinguish the three cases, especially when thinking about implications for public policy.

Still, wonderful discussion on balance. I just wish more economists would be like Russ Roberts (and Adam Smith!) and recognize that our moral universe is a rich and complicated place, and that it can't be reduced to doing whatever maximizes net social benefits.

rhhardin writes:

Coleridge somewhere wrote that moral puzzles deaden the moral sense (my intuition is that it's in _The Friend_ or _Essays on His Times_, were I to go looking for it), which I think is a side-effect of clarification getting involved with morality.

The important stuff gets cleared away when you clear things up.

I wish more economics took notice of the huge surplus in every voluntary transaction, the more specialization the more huge.

That's opposed less to morality than to moralizing, the surplus that people get from thinking of themselves moral lawgivers.

Levinas says that morality comes before reason (ontology, actually) (_Totality and Infinity_) and so reason depends on morality, rather than the reverse.

The machinery is that what you do defines you for the first time, constitutes you, makes you for the first time unique and irreplaceable.

That's what makes it moral, so to speak.

If you delegate to a rule, that doesn't happen.

So anyway if you want to reason about morality, you have to take into account that reason depends on morality.

Levinas's very neat comment on Messianism was who takes on the suffering of mankind except the person who says "Me"? Everybody is the Messiah.

So what should the candy maker and the doctor do?

Something along the lines of what Radio Japan once said was essential to Japanese contracts. If one side later becomes unhappy with the terms, it's time to renegotiate the contract, not to stick it to him.

rhhardin writes:

The influence of the rich :

Take into account that taxing the rich, directly or indirectly, does not reduce the standard of living of the rich.

It reduces the investment of the rich, which comes out of the earnings of the poor via reduced capital investment. The extra dollars go first.

It comes out of economy's seed corn, not out of the meals of the rich.

You want the rich rich because at the moment they're the ones not screwing up the economy.

Greg G writes:

Great example here of why EconTalk is my favorite podcast. I knew nothing about Coase before listening to EconTalk. There have been three episodes on Coase, all significantly different. I can't imagine how I could have learned more about Coase in three hours than by listening to these podcasts (well, actually four hours because I listened to one twice).

Russ, I know you and Robert Frank come from significantly different ideological viewpoints. It is really a pleasure to hear you both demonstrate how people from different viewpoints can discuss these issues respectfully and productively. It is easy to forget how much we have shared values and knowledge beneath our disagreements on economics and politics. And it is a real tribute to Coase that he could inspire such a wealth of ideas.

Thanks for this one and for all of them.

Derrick writes:

I think Russ and Robert missed something in the hand-holding example. Both agreed that the example situation would result in only psychic harm, and so moved on to the car radio example.

Certainly in the case of people who don't like to see the hand-holding, their injury is only psychic, however a prohibition against hand-holding is not just psychic for the couple who wants to hold hands. Any prohibition would have a built in threat of physical violence. (jail or perhaps a fine followed by eventual jail if the fine was ignored)

Psychic injury or not, hand holding around those who object would cause no physical harm, however attempts to prevent consenting adults from hand holding by definition would cause physical harm.

Alan Clift writes:

Can the most effient cost be determined for the doctor and confectioner example? Maybe other factors are involved, such as the impact on other occupants of the building, or employees of either business.

F. Lynx Pardinus writes:

What a particularly fantastic episode! Thanks so much.

Floccina writes:

Great podcast.

Coase's theorem has really changed my thinking.

I too prefer that my sons do not smoke but I also do not want them to become cigarette smugglers but you keep tempting them with more and more money.

Les writes:

Russ, I think you really enjoy this open debate format. I swear I could hear you smiling throughout the recording.

Lots of very good points. One thing I think about in the income disparity issue is that wouldn't those issues be self-correcting to some extent in that the payments would be a transfer of wealth that would balance out the wealth inequality that the supposition started with.

Ben Hughes writes:

Another great episode. There were two parts that left me wondering though. First, as mentioned by Derrick, is that having a law control your behaviour is not "merely" a psychic harm.

More strangely to me though was the idea that Coase would be supportive of a Pigouvian carbon tax. I may be out of my depth here, but I thought that one of the core insights of Coase was that the assignment of property rights was (when the circumstances were right) the ideal way to achieve the most efficient outcome.

A more Coasian approach to AGW would surely be an emissions trading scheme/cap & trade system. Or have I confused myself?

Bob Shupe writes:

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Ralph writes:

Bargaining based on a false assumption only produces inefficiency. The problem is distinguishing fact from fiction.
Anthropogenic global warming exists or it doesn't (it doesn't).

The Coasian approach applies when there are statements of fact, and it applies on individual basis - it works With the subjective preferences of each individual to produce efficient outcomes. A grand official active public policy that doesn't accomodate each individuals' subjective preferences is an inefficiency - a government failure.

"Best estimates" may still be wrong - and they have been consistently on climate change.
There is no proposal of CO2 reduction that could possibly change the wildly overstated consequences predicted by the true-believers of the Anthropogenic Global Warming religion.

A Coasian solution accomodates each individual - each recieves some outcome that compensates for their loss.
The supposed benefit of Carbon Taxes for those who lose not only on the tax, but on the inevitable loss of productivity and jobs, and increase in prices of manufactures, is supposedly no world-ending climate change. But those global warming claims are false anyway, and even if they were true, the Carbon Tax couldn't prevent the outcomes. The benefit side of the equation is an illusion.

It is an inefficiency due to the false premise of Anthropogenic GlobalWarming - GOVERNMENT FAILURE.

chitown_nick writes:

@ Michael Barry -

It's an interesting question (re: florists who object to selling flowers to gay couples getting married), and I think the answer comes down to a couple key points. First, how is the marriage viewed, either legally or culturally? If the conclusion is reached that this is the same as another marriage, and the objection is solely a result of the florist's discomfort with the ceremony participants, then it equates back to similar civil rights understanding, and a law disallowing refusals of service is justified.

A second way to think about it is that the florist is selling an artistic arrangement of flowers, which is at the end of the day a tangible product. Once they sell it, the buyer has the rights to that tangible product. At that point, what does it matter to the florist what they're used for? In a parallel example, can a textile manufacturer object to their fabric being used for the clothing worn at the wedding, or something similar? The extension of that idea would allow someone to refuse sale to the couple for the rehearsal dinner as well, and more and more events down the line, which would also be unacceptable in a society that supports equal opportunity and equal protection.

Here, I'm not sure if it's a direct application of Coase, or a parallel example to the hand-holding discussion, (which seemed more convincing the way Derrick expressed it that just the way it was presented in the podcast discussion).

chitown_nick writes:

Thanks for the discussion gentlemen - always a good thing to hear a good conversation, and a model for polite disagreement as well.

The doctor's office and the candy maker reminded me of a situation I've encountered, and I'm still not sure how the subtleties work out. I'm struck in the example you discussed that there wasn't a whole lot of weight given to the fact that the candy maker was there first. The doctor then expanded into an environment that was known to have a noise problem. Isn't more expected of the doctor in this situation?

In the situation I've seen, a manufacturer has a water treatment pond to ensure that they return clean water to the city. The pond, however, is pretty dirty and smelly, while the bacteria clean up the water. The plant was built 30 years ago. 10 years ago, some people in town built new, large houses on the hill just over the plant. Now they complain about the smell from the pond. If it would take $1M per house for the home owners to pick up and move across town to a similar site, and there are 30 home owners, and $20M for the plant to make some changes to the pond (all hypothetical) to reduce the smell, does Coase suggest that the plant should be obligated to make the change? Why not say "too bad, homeowners, you knew where you were building, and no significant change has been made since you moved in."

Or take all courts out of it, and leave it strictly to the private parties to incentivize each other to come to a better solution than any blanket policy might achieve?

chitown_nick writes:

Great discussion, although there was one point I was sad that I thought was missed. In the discussion of the poor violinist and the rich neighbor, the disproportionate wealth and disproportionate degree if interest was, I thought a great opportunity for another discussion.

What if the greatest economic outcome wasn't defined monetarily? That leads to a different outcome. The poor violinist has no money to support their view, but has a great personal benefit from playing the violin, and can best afford to play at 10PM (they work during the day, perhaps). The neighbor receives only a minor annoyance from this. The greatest personal benefit that can be reached in this situation is to let the violinist play. If they negotiated, the violinist might pay $5, but might not accept $10,000 to stop. Instead, if they negotiated, the neighbor who is slightly annoyed might let them play, once they hear why it is so important to the violinist.

This would come back to the Theory of Moral Sentiments, and can still be consistent with Coase's thinking, just not limited to monetary measure as the end all of beneficial outcomes.

chitown_nick writes:

@Ralph -

I noted in the conversation that Robert Frank started his discussion on the assumption that global warming science was true. Then he ended on the possibility that it might be false, and opted for the opposite policy than he had proposed just a minute earlier. I'd hesitate to say there's a helpful public policy lesson from this example, other than that any position can be rationalized, right or not.

I agree with your point that "Bargaining based on a false assumption only produces inefficiency." I fall on the other side of the scientific debate from you, but I also believe that the argument that "the world may cease to support any life, and therefore any level of carbon tax is justifiable" is overstating the risk and is unhelpful, at best.

I do believe that there is a possibility for public policy in areas of ambiguity, but that these are often difficult to negotiate, and are best moved slowly. In that vein, I think that given then current state of knowledge and existing policies, the argument could be made that there are a growing number of scalable energy systems, and of these, renewables can best be given an equal footing for competition by removing specific tax breaks for fossil fuel exploration, etc. Carbon reduction can be incentivized by opening regulations to allow cogeneration systems that actually reduce energy costs and reduce carbon emissions, without any movement toward a carbon tax yet.

Without these types of steps, we'd be piling a potentially damaging economic cost on top of a system held together with band-aids anyway.

John Covil writes:

Great conversation so far, with a lot to think about.

I was curious about something Frank said about climate change: that the predictions keep coming up worse and worse. Didn't the latest IPCC report revise models to reflect a lessened sensitivity to atmospheric carbon dioxide levels?

I'm asking that seriously, not in a leading way. My honest understanding of the latest science is that it was trending the other way. I may well be missing something.

Also, a question for other deontologists (such as myself) out there: do you ever utilize consequentialist arguments when they support your position? Do you feel hypocritical in doing so? Should you?

Mads Llindstrøm writes:

Ben Hughes wrote:

More strangely to me though was the idea that Coase would be supportive of a Pigouvian carbon tax. I may be out of my depth here, but I thought that one of the core insights of Coase was that the assignment of property rights was (when the circumstances were right) the ideal way to achieve the most efficient outcome.

Except that it is very difficult to argue that property rights would be more efficient than a carbon tax. At least if we are talking a cap and trade type system. Think about when a polluter would pollute less. In a carbon tax scenario the polluter would pollute less, when the benefit to polluting were smaller than the tax. In a cap and trade type system, the polluter would pollute less when the benefits were less than the market price of carbon pollution allowances. So there is no real differences, except for how the price of carbon allowances are determined.

But a carbon tax could be designed to mimic the good aspects of a market price, while having less fluctuations and being more predictable. Predictability would lead to more investment in minimizing carbon pollution. On top of that, society would avoid all the cost of carbon allowance trading, such as stock brokers, markets, security fraud surveillance, ...

Therefore, a carbon tax is more efficient than a cap and trade type system.

Ralph writes:

Bargaining based on a false assumption only produces inefficiency. The problem is distinguishing fact from fiction.
Anthropogenic global warming exists or it doesn't (it doesn't).

The Coasian approach applies when there are statements of fact, and it applies on individual basis - it works With the subjective preferences of each individual to produce efficient outcomes. A grand official active public policy that doesn't accomodate each individuals' subjective preferences is an inefficiency - a government failure.

"Best estimates" may still be wrong - and they have been consistently on climate change.
There is no proposal of CO2 reduction that could possibly change the wildly overstated consequences predicted by the true-believers of the Anthropogenic Global Warming religion.

A Coasian solution accomodates each individual - each recieves some outcome that compensates for their loss.
The supposed benefit of Carbon Taxes for those who lose not only on the tax, but on the inevitable loss of productivity, jobs and increase in prices of manufactures is supposedly no world-ending climate change. But those global warming claims are false anyway, and even if they were true, the Carbon Tax couldn't prevent the outcomes. The benefit side of the equation is an illusion.

It is an inefficiency due to the false premise of Anthropogenic GlobalWarming - GOVERNMENT FAILURE.

Bjorn writes:

Thanks for a really interesting discussion.

The topic got me contemplating the following potential paradox: "Are the ultimate consequences of a consequentialist society better or worse than the consequences of a society based on deontological ethics?"

I am for instance thinking about the disutility of unpredictability: all members of society know that they could be used as a means to an end if the situation demands it.

Tristan writes:

Why do economists love efficiency and Pareto optimality in their models? Certainly it makes for elegant mathematical models, but I think that beyond that, there has been a drive to remain apolitical.

Since distribution of wealth is and has been a contentious political issue (and probably always will be) I think economists have shied away from tackling this head on for a number of reasons, some more noble than others. One is out of simple fear of offending some constituency or powerful interest groups (perhaps one which many economists themselves are members). Another is out of a desire that economic models be generic to a range of political choices. Such generality might, in principle, lead to models that provide actionable policy advice regardless of political persuasion. In fact, however, I think it often leads to trivial results or policies of marginal value.

Economics is inherently bound up with politics and economists need to either be enlightened enough to take the devil's advocate position against their own beliefs in order to test them, or at least to be fully honest about their personal perspectives. Trying to take no position in the game means ignoring some of the most important issues our society faces.

Tristan writes:

This debate between the consequentialism of Coase vs. a morally grounded deontological approach seems like a completely false dichotomy. There is no reason why one must substitute for the other, in fact the approaches seem complementary. One is a descriptive analysis of causal relationships, the other is a normative analysis of human social behavior. They only get confused when we use them with the same kind of prescriptive language to guide decisions.

In the physical world, there are no morals, no rights and no sins. There is only cause and effect. This is the domain in which a purely descriptive analysis of costs and benefits is most appropriate. However, we are social animals and shape each other's behavior by means of social value systems. In this respect we also care about the normative basis for decisions. As you alluded to a few times, one can make consequentialist arguments about the costs and benefits of being in a society with certain normative values. One can also subject consequences to a moral analysis. To me, this double-dissociation indicates that these are actually different modes of analysis, not competing perspectives. We should be guided by both in concert.

Russ Wood writes:

EconTalk is my favorite podcast, and this was another fascinating dialog.

I thought that Prof. Roberts let Robert Frank off the hook too easily on a couple of points, where I wish he'd pushed him more:

1) More than once, Frank said "that's the same result that consequentialism would reach," without ever explaining how he reaches that conclusion. Those conclusions were not self-evident to me. Also, consequentialism can end up in different places, depending on who's driving.

2) In the hand-holding discussion, Frank argued that, because the majority will adapt, that settles the question: the rule should be set against the majority. I think that he got away with greatly undervaluing the costs of adaptation. One can say that the country has "adapted" to the post-1930's reluctance of the Supreme Court to protect economic liberties, but that does not mean that the Court's failures in that area come without costs, or that the adaptation itself was without costs: in my opinion, significant costs on both scores.

Please indulge a newb writes:

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Ben Hughes writes:

Mads Llindstrøm writes:

Therefore, a carbon tax is more efficient than a cap and trade type system.

I'm not sure how that follows. A property rights scheme allows the right to pollute to be traded, and hence those who derive the most (economic) benefit from pollution will be the ones who buy up the rights.

Taxing pollution limits it, but does nothing to move pollution-use to areas where it is most valuable. A tax would keep polluters in business whose rights, under an ETS, may be bought by other polluters whose marginal value of pollution is higher.

The difficulty of a trading scheme would be that, unlike a tax, it would be harder for the government to inflate the cost of pollution after the initial allocation of property rights. Though, I suppose they could act in a similar way to OMO, and buy up rights on the market and keep them out of circulation.

Asif Khan writes:

Always have been fascinated by the work of Mr Coase. The episode where he was interviewed and told about his interaction with Keynes was downright funny.

Earl Rodd writes:

Great podcast - the challenging of each other's
ideas really draws out subtle distinctions. Robert Frank did an excellent job of making clear Coase's insights.
On a side issue, I was sad to hear Robert Frank accept uncritically the "10% chance of climate
catastrophe" claim of a climate model. Economists above all should be sensitive to the meaninglessness of such numbers - for low probability events we have NEVER observed, we do NOT know the probabilities. Especially so in an area like climate where so many mechanisms are poorly understood (which is why models cannot reproduce the last century or millenia). It is one thing to honestly argue that a certain action is justified based on belief, but quite another to accept meaningless predictive percentages!

Daniel Barkalow writes:

It seems to me that Coase's method leads to two types of information: what gets done, and how much money would be transferred. In the poor violinist situation, the two parties would end up reaching a conclusion where the violinist wouldn't practice late at night, but the rich listener would pay the violinist a lot of money, and either the violinist would decide to quit her day job and practice at a time she hasn't agreed not to make noise, or she'd put up a lot of expensive soundproofing so that she could practice in the middle of the night without disturbing anyone. If you say that government should match what people would do, if you ignore the transfer payments, you've got noise ordinances, but if you include the transfer payments, you've got arts fellowships.

The other thing that the transfer payments address is shared liability. Back in the doctor/factory example, what individual contracting between willing parties would have done is had either the doctor pay some for the soundproofing, or the factory pay some for the doctor's moving costs; they wouldn't have compared costs, found who could address the problem most cheaply, and then made that party pay all of the costs. Of course, if you leave that out, you have the doctor intentionally getting extra hard-to-move equipment in order to make the cost of the solution he doesn't like bigger, and the factory making their equipment as loud as possible, and they'll reach the solution which is harder to make inefficient, which will be worse than either of the solutions would have been.

Mads Llindstrøm writes:

Ben Hughes writes:

I'm not sure how that follows. A property rights scheme allows the right to pollute to be traded, and hence those who derive the most (economic) benefit from pollution will be the ones who buy up the rights.

A tax is the same, thus who derive most for polluting (more than the tax) will choose to pollute. Thus who derive the least from polluting (less than the tax), will choose not to pollute.

Mr. Hughes, you choose to quote my conclusion, but not my actual argument. I guess my argument was not clear. Therefore, I will try to make my argument by using a concrete example.

Try to image what flesh and blood people will do in case of a tax and of a cap and trade system.

Image that you could rent* a right to pollute 10 tons Co2/day for $100/day. When will you rent the right to pollute? When the pollution of 10 tons Co2/day, will gain you more than $100 per day.

What about a Co2 tax? Image that the tax for polluting 10 tons of Co2 is $100. When will you pollute? You will choose to pay the tax when 10 tons of Co2 pollution/day, will gain you more than $100/day. This is exactly the same as the cap and trade system. If a tax contra cap trade system makes no difference for how people act, then there is no difference in results.

The only potential difference in how costly it is to run the system and how the price is determined. I dealt with both issues in my original argument.

* I use rent in stead of buy to make the example simpler, but a more complex version of my argument applies to buying a pollution permit.

Jim Glass writes:

Prof. Roberts: First, thanks for the podcasts in general -- and these Coase-casts in particular. Coase has been my econ hero since my law school days, and I can't get enough, all points of view appreciated. Keep 'em coming. Please!

Now, to join the conversation...
~~~~~~~~~

Most of us reject, on moral grounds, the idea from Coase...

Who is "us"?

... that "all externalities are reciprocal." This is because there is a deep distinction between causal responsibility and moral responsibility. While it's true that if my face wasn't in the path of your fist, I wouldn't have a black eye, it's also true that if your angry fist struck my innocent face, you're at fault, and we don't share the responsibility. This remains true even if the enjoyment you got from punching me exceeds the disutility I experienced from being punched...

Frank's very point was that these moral claims often are invoked *falsely* -- and is there a better example than this?

Coase is explicitly about free voluntary exchange and, as Frank explicitly stated, maximizing social surplus.

Extortion (or sadism) through physical violence is the opposite of the former, and as a "negative sum" activity is a destroyer of social surplus and thus the opposite of the latter too.

The very example is nothing but name-calling, refusing to even consider what Coase or Frank actually said.

So let's take a much more credible example frequently used to illustrate the same problem: Coase's own of the railroad running next to the farm that emits embers and ashes that damage the farmer's crops.

Of the people I've known who've considered this, 90% on first blush have said the train line is at moral fault because it is the actor destroying the farmer's crops, so it should be penalized and pay the farmer. Morally clear, one and done.

But wait -- suppose the railroad was there first, and the farmer later built up to the edge of the railroad line to be able to cry "victim"? What's "moral" about letting the farmer get away with extortion? The answer I usually get to that is: OK, justice and morality require us to see who was there first.

But wait -- how much logic is there in that? Are we going to have a different result for each acre of land and each hundred yards of track (and a separate law suit for each) when the conditions are the same on all? That's "moral" and "just"? It sure isn't legally inexpensive. And what if it is impossible to tell? Farms and railroads both grow incrementally.

And now (some) people can see, yes, the "morality" thing was an unthought-through reflex. The better policy is to adopt the least expensive fix that maximize the welfare of both and have them divvy up the cost between them by negotiation. Or the closest approximation to that we can get by govt action.

(I won't go on about the immense *positive* externalities and social surplus created by a new railroad that for first time brings fresh food, fruit, milk, etc, to a community that formerly was limited to foodstuffs that wouldn't spoil/rot in the distance a horse cart could carry them. That "immoral" railroad. Let's see the virtuous farmer create benefits like that. But negative externalities always get far more attention and emotional response than positive externalities.)

Jim Glass writes:

Russ: Should you be allowed to steal somebody's car radio? Most of us would say no... [but] the cheapest way to reduce radio theft might be to not make it be illegal ... I have I think some empirical evidence for it, that actually owners of radios prefer a world where it's legal to steal somebody's radio ... over time, radio-makers, manufacturers, car manufacturers, will find ways to make it useless to steal the radio. And that's likely cheaper--in fact, I'm very confident that it's cheaper than the costs of policing the streets

I was going to let this pass, but since you explicitly asked for comment...

Russ: ...anyone who is listening, please feel free to write in the comments in this podcast episode, the time that you had your car radio stolen or your car broken into or your iPod stolen ... It's not just that it's too expensive to staff the streets with enough police that they stop it. They are indifferent to it most of the time.

They sure as heck are not, not where I am, here in NYC. They pay plenty of attention to it. Break into a car with a cop anywhere near, or have someone report you to the cops, and see what happens to you. Subway fare jumping is an even smaller offense, and they *plenty* of attention to it. Broken-windows policing.

In the 1980s, yes, you couldn't leave anything in your car on my street or it would be robbed. A car with out-of-state plates had to go into a garage or it would be *sure* to have its trunk broken into. Turnstile jumping was practically the city's official sport.

Then in the Giuliani years turnstile jumpers were held in chains in lines 20-jumpers long sometimes, literally. Turnstile jumping disappeared. Same policy with auto break-ins. They *never* happen on the same street today. Auto-theft crimes in NYC are down 96% (!) since 1990.

I'm supposed to *prefer* a world where this never happened, because it would be "less costly" to keep suffering endemic break-ins and have the market fix it maybe someday? The market *didn't* fix it for 30 years -- 1960s, 1970s, 1980s. How long was I supposed to wait for "less costly" to arrive?

Effective policing isn't so expensive. One policeman can deter 100 crimes, if law enforcement is done right. The issue is taxpayers getting what they pay for.

OK ... beyond that I just don't understand some things:

[] I see nothing Coasian in making theft legal. Coase is about allocating property rights -- your proposal *eliminates* property rights. I hate to sound like a lawyer, but if you make theft legal it isn't theft any more. If anyone else can just walk off with things in your possession, you have no property rights in them. (You can't say "We're making theft by thieves legal, but theft by non-thieves remains illegal".) If anyone else can take them legally at will, you don't own them.

Why would people pay to buy car radios they have no legal right to keep and don't own? What happens to the car radio market then? Why would a "radio security industry" develop to help people keep un-owned things that others have a legal right to take and walk off with?

Then of course there is everything else -- the luggage in the trunk, the car itself ... surely we can't make theft of everything legal, eliminate all property rights, believing the market will innovate something better. (I'm a big believer in markets, but not that big!) If we are going to make it legal for others to walk off with some of your possessions but not others, then are we going to have a "committee" somewhere deciding which is what, what will now be legal to steal, er, for anyone to walk off with, in light of their opinion of anticipated technology?

ISTM that keeping property rights as we know them plus effective policing is much better, keeping Lojack as a backup. Coase said markets depend on having optimally allocated property rights, not eliminating them.

[] Your comparison to Napster seems inappropriate. That case involved rights to intellectual property, which are indeed Coasian. If B copies a music file possessed by A, A still possesses it. The issue there is creating property rights in a form so that copying fees provide enough revenue to music producers to finance new music without taking excessive rents from music consumers, in the optimum balance to maximize social surplus. Very Coasian.

Not eliminating property rights so some stranger can legally walk off with your whole music collection and the equipment it's on, at least if it's in your car. No social surplus in that. Not Coasian at all.

Loc writes:

2008 or so, Me and 3 other neighbors had our cars broken into the same night. Not sure if they caught the thieves... Probably not though!

Eric Delph writes:

I did not like the interracial hand holding example because today's society has a different view of this behavior than at the time. Indeed, a lot of the arguments for or against this example were based on today's social views. I would propose changing it just a little, to an example that challenges our current social views. An interracial couple holds hands in public ... naked. Or a couple of the same race holds hands while naked in public. For all we know, in 50 years this may be socially acceptable behavior. Now debate this example for externality resolution.

Pietro Poggi-Corradini writes:

I'm confused:

1. "Guest: Yes. I think to an economist a situation is efficient if it results in the largest possible economic surplus."

2. "Guest: Right. If you've done something inefficiently then what that means is that there is at least in principle a way to rearrange things so that everybody gets more of what he cares about."

The first case allows for some people to be losers in the equation, while the second case requires everyone to be better off. I'm not sure, then, what efficiency really mean.

Steve Sedio writes:

Regarding the "decriminalization" of car radio theft. I suspect 99.9% of the laws on the books are unenforced (I also suspect 90% are unknown, even to law enforcement. Ever walk through a law library?). Unenforced laws provide little social benefit, but incur a huge social cost. As the numbers of laws increase, the number of lawyers (and billable hours) increase, the hours of arbitration, court / jury trials increase. Has that all really made society better?

Two quick comments on "climate change". Government's "solution" is to tax CO2. This experiment has been ongoing in Europe for the 50 years I have been following global gasoline prices. Has that resulted in anyone developing cost competitive, CO2 neutral energy for the European market that resulted in reduced CO2 emissions?

CO2 has a half life of approximately 100 years. The only way to stop further heating is to cut CO2 emissions to zero. With no CO2 neutral sources of energy, that would cause global economic collapse. To reverse heating, we need to pull more CO2 from the atmosphere than we create. That tech for that doesn't exist either.

chitown_nick writes:

Steve Sedio writes:

Government's "solution" is to tax CO2. This experiment has been ongoing in Europe for the 50 years I have been following global gasoline prices. Has that resulted in anyone developing cost competitive, CO2 neutral energy for the European market that resulted in reduced CO2 emissions?

The simple answer is yes. Current (2012) fuel use per distange in European cars is only 76% of the proposed (2016) standard in the US. Fuel is more expensive, and vehicles by choice or by regulation use less fuel, resulting in less CO2 for the same activity.

Mads Lidstrom's example of a carbon tax is hopefully not how this type of policy would play out in real life. If carbon credits trade for $100/ton, the cost of the carbon reduction plus the cost of the transaction would have to be less costly than the cost of continuing the emissions. This would skew activity primarily to large players, and the investment in the reduction would have to deal with an uncertain market. Therefore, if prices range from $50-$150/ton for the credits, maybe only players that can reap huge benefits to outweigh the transaction cost at $50/ton will actually change their behavior.

However, in the case of the carbon tax, the cost is imposed on everyone, and (although after some initial setup costs) the transaction cost for any change in behavior reduces to near zero. It's a utility cost. Then, maybe the tax is $30/ton, but it's always $30/ton. This gets a lot more participants, and provides the desired stability to the large players would would risk large capital investments.

I believe this is the desired outcome, and from a Coasian point of view, this could provide the same benefit at the least cost, and (if a carbon policy were desired) would be the best policy based on economic efficiency.

rhhardin writes:

One slight problem with individual negotiation of externalities is that if a manufacturer pollutes, the benefit goes to the consumer not the manufacturer, unless the manufacturer is the only one doing it.

The price advantage is competed away.

So the neighbor has to negotiate with the consumers rather than the manufacturer.

That was resolved in the 60s by society deciding that it was willing to pay more for stuff and have a clean Hudson river, by way of law.

Shawn Barnhart writes:

This was a very enjoyable podcast, even for a dilettante such as myself.

I know the confectioner/doctor scenario was a deliberate simplification, but since it wasn't mentioned and seems obvious, I have to ask -- why does the doctor have a claim against the confectioner for noise in his new office space when the confectioner was already there, and presumably making noise?

If the doctor has a need for a quiet place to practice medicine, wouldn't that have been a criteria used to evaluate a potential space? Isn't the doctor solely responsible for the uninformed acquisition of a space unsuitable for his needs? I'm assuming that there was no subterfuge in acquiring the space, such as the confectioner suspending production only when the space was examined or the agent for the space only showing it when the confectioner was closed.

Doesn't the confectioner have a claim based on the fact that he was there first?

I'm sorry if I overthink this, but it seems absurd and unfair that I can move into a place where somebody already exists and has been making some kind of noise and I show up and say no, you can't make that noise because now I'm here and that noise is burdensome.

If I move next door to an otherwise law-abiding nightclub that happens to play loud music until 3 in the morning I can just say "Hey, I live here now, you can't play music past 10 PM because I need to sleep"?

SaveyourSelf writes:

Robert Frank said, ” Well, you've just got to see what agreement they would have reached if they had been free to negotiate with one another, and then have the law try to set up property rights so as to steer them to that agreement.” He goes on to say that, “Laws and regulations, property rights, all such things should be designed in such a way to mimic the agreements that free people would have reached in their own interest had negotiation been practical.”

  • There was a vibrant discussion in the comments section of Mike Munger’s econtalk interview on John Locke over Man’s ability to design legislation that produces outcomes similar to what “free people would have reached in their own interest had negotiation been practical.” The upshot is that it is not possible. First, asking what “free people” would do implies that they are not free, which leads us to the inescapable conclusion that we are trying to reverse-engineer a solution to slavery without actually abolishing slavery. I think it is obvious that the solution to the problem of slavery, first and foremost, is Freedom. Mr. Frank and Mr. Coase nimbly avoid that problem by assuming that negotiation between the “free” parties to the trade is not practical due to “high transaction costs.” This is a highly dubious claim, given the details of the example. The confectioner and the doctor share a wall in the same building, after all. How difficult would it be for them to walk to the next door and strike up a conversation? Perhaps, though, they carry some animosity towards one another and won’t talk except through their lawyers and, perhaps, even with the aid of two paid lawyers they cannot come to an equitable agreement. Even then they both can—and would—hire professional arbitration before seeking court injunction simply because it is sooooo much cheaper. Only after failing all measures of reason and prudence would they then seek intervention by the government. [This assumes, of course, that they are aware of the cost and must personally pay the cost of the lawyers, arbitration, and court proceedings. If the government pays for any of those costs from general tax revenues then the behavior of the doctor and the confectioner would diverge from that predicted by a societal cost-benefit analysis. I am not tooting my own horn here, but that is a very important point. Ostensibly Mr. Coase wrote his paper in response to a discussion by a, Mr. Pigou, regarding “…a divergence between the private and social product of the factory…” (1). Mr. Coase did not notice or did not mention explicitly that such a divergence is guaranteed whenever the costs of a decision are born by someone other than the person making the decision. This is the difficulty with naturally occurring public-goods [like air quality and water quality]. What is not so obvious—but equally destructive—is that ANY good that is consistently paid for by someone other than the beneficiary functions as a public good].
  • According to Coase, we are judging what is right by what is efficient. And we were told that efficient means a distribution of rights to production that lead to the maximum possible surplus. Since any unnecessary expenses, by definition, reduce the surplus; government solutions, which always add expense, are inefficient if they can be avoided. In Mr. Franks defense, Coase himself does not recognize this point. Namely that [almost] any arrangement that requires three parties to negotiate (buyer-seller-and government) will have larger transactions costs than [nearly] any arrangement made by two parties alone (buyers-seller). The assumption in some of Coase’s models that “transaction costs” are so high that the addition of the costs of government intervention leads to a reduction in total transaction costs appears arithmetically unlikely.
  • To sum up, it is not possible to devise legislation that produces the same outcomes as free men would have produced except for want of freedom AND it is not possible to reduce the costs-of-negotiation by paying the government to eliminate negotiation. What you end up with is—at best—higher negotiation costs and—at worst—a complete absence of negotiation…which is slavery. So when Mr. Frank says that, “It's very hard to oppose philosophically the claim that the right set of laws is the one that mimics the agreements that free people would have reached had it been possible for them to negotiate with one another,” I must completely disagree. FIRST MAKE THEM FREE! The “right set of laws” are the agreements that free people create, not some other person’s fantasy version of them.


Robert Frank said, “interestingly, the deontologists reach exactly the same conclusions as the consequentialists in 99% of the cases”

  • If that number--99%--is true, then that is an awfully strong correlation. Such a strong correlation might even suggest that the two words are similes. I suspect that “Deontology” is simply a word describing decision making using heuristics [rules of thumb] rather than decision making through laborious consideration of costs and benefits. Practically speaking, all people use heuristics heavily to guide their actions through life because there is simply too much information to consider every detail of every question every moment of every day. So all people are Deontologists most of the time AND all Deontologists are Consequentialists for—at a minimum—long enough to develop their heuristics.

Robert Frank said, “I think to an economist a situation is efficient if it results in the largest possible economic surplus.”
  • This is a fragment. A Pareto-efficient economic outcome is one where no change can be made to increase the economic surplus without making someone worse off. Mr. Frank left out the end portion of the definition which requires Justice. Russ Roberts adds the missing fragment back in later when he says“…we'd also care about whether your share of it gets larger or not.” Mr. Coase would undoubtedly agree since, in his paper, he says, “It goes almost without saying that this problem has to be looked at in total and at the margin” (2). It is not practical, therefore, to consider societal surplus without simultaneously considering individual Justice. [As a personal aside, Mr. Frank may not have left that portion of the definition out by accident. Its absence—nay its opposite—is the defining characteristic of left-leaning solutions.]

Mads Llindstrøm wrote, “a carbon tax is more efficient than a cap and trade type system”

  • A carbon tax increases the cost of an individual good in a fixed, rather arbitrary, and entirely unresponsive manner. A cap and trade system is a substitute-market that can operate in place of an otherwise untradeable public-good. The benefits of the cap-and-trade (free-market) solution include: lowest possible cost, highest possible quality, efficient distribution of resources, AND incentives to innovate. Innovation might include—but is not limited too—actually removing carbon dioxide from the atmosphere. No tax can reward risk takers for experimentation and innovation like that. The only thing taxes reward are bureaucrats and lobby groups. Thus, even though it is more complicated—and therefore more costly in the short run to establish—in the long run the cap-and-trade approach is immensely—as in orders of magnitude—superior to the tax type solution.
SaveyourSelf writes:

For the sake of education, I would like to point out that all through The Problem of Social Cost, Mr. Coase makes distinctions between market-solutions, common-law-solutions, and legislative-solutions. He idealizes market solutions, praises common-law solutions, and frequently decimates legislative solutions. Interestingly, in spite of his observations on logical flaws and generally undesirable outcomes of legislative solutions, he does not take a firm position against them. This is presumably because of the special case of “public-goods.” He did not use the term, public-good, but he defined it when he wrote, “There is no reason why…governmental administrative regulation should not lead to an improvement in economic efficiency…when, as is normally the case with the smoke nuisance, a large number of people are involved and in which, therefore, the costs of handling the problem through the market or the firm may be high.” This is a nice addition to the discussions we had in the past on the strengths and weaknesses of these different types of solutions and also on public-goods.
This econtalk episode had a great discussion both in the podcast and in the comments on legislation vs. common-law.

Greg G writes:

SaveyourSelf,

--"Even then they both can—and would—hire professional arbitration before seeking court injunction simply because it is sooooo much cheaper. Only after failing all measures of reason and prudence would they then seek intervention by the government."

This ignores the fact that most disputes that lead to coercion or violence or court action are much more driven by emotion than dispassionate economic logic. Virtually every psychological study done on the question has shown that people who think others are behaving badly are willing to incur surprisingly high costs to punish the perceived bad actors. These costs seem irrational to economists because they fail to realize that they are not driven by economic reasoning.

But it's even worse than that. In most serious disputes each side believes that the other is the aggressor. This includes many cases where you and I could agree on who the aggressor is and some where we might disagree.

Most lawyers will tell you that a big part of their job is lowering the expectations of their clients who tend to think that anything that offends their personal sense of fairness must surely have a legal remedy that includes punishing the perceived offender in some way.

David Zetland writes:

The radio example was interesting but I don't think that Russ pushed it. A law doesn't codify what's right or wrong. Morality does. A law codifies what the State will not accept and will prevent or punish. The State enforces drug laws that many feel are immoral in themselves, just as states enforce a ban on gay marriage.

The radio example illustrates the problem of a law that is moral (stealing is wrong) but unenforced. In this case, citizens put a false hope in police protection, which leads them to lower their guard (i.e., leave the radio in the car). I think that Russ could have said this, i.e., no law (not legalizing theft) would help citizens see that it's 100% their job to take care of their radio. Out of this would come anti-theft actions and innovations.

The same is true about anti-bike theft laws. It's also true about laws against stealing from tourists abroad: you're on your own.

JasonW writes:

I get frustrated some times listening to economists talk about solving problems with money. I wish we could learn to speak of value more broadly and creatively than that.

Michael Byrnes writes:

Ralph writes:

"Bargaining based on a false assumption only produces inefficiency. The problem is distinguishing fact from fiction.
Anthropogenic global warming exists or it doesn't (it doesn't)."

This is exactly the same kind of hubris that affects many of the believers in AGW.

Absense of evidence is not evidence of absence.

GregS writes:

"I would say that free speech is very easily defended in consequentialist terms. There's enormous benefit from each of us being able to speak freely. ... But if we try to write a law that would micromanage the speech of individuals and filter out the harmful speech and let the good stuff through, it would be a fool's errand, really. You could never hope to fine tune it in that way."

I think that Professor Frank really nails something in this passage. He very clearly articulates the case for having very strong property rights. He clearly understands the rationale for having a general "free speech" rule. The structure of his argument applies just as strongly to property rights. Yet, from my understanding of Frank's position, he would very much like to dilute property rights. He would "micromanage" in an attempt to "fine tune" the distribution of property, taking from some and giving to others, in an attempt to make the world better off. I don't know why he thinks that this doesn't work in the context of speech but thinks it does work in the context of property rights. As a matter of historical/empirical fact, attempts to make everyone better off through redistribution have not exactly yielded dividends. In my opinion these efforts have done net harm, even if you totally discount the people who are net contributors and only look at the recipients. Professor Frank makes an excellent argument. He should take it to heart instead of applying it so selectively.

AD writes:

I think Russ got a little carried away with his "make radio theft legal" thought experiment. It sounded like he just wanted to make the point that the market picked up where the law was unable to enforce, which pretty much everyone can agree with. Frank was understandably confused how making it legal could be an improvement, even with lax enforcement.

wef writes:

I'm sorry, but this was a hand-waving discussion of consequentialism without specifying the morally justifiable consequences desired that are to be had by state violence. Fine, teasing out the nuances of Coase's insights for contracts might be interesting, but then to jump to rationalizations for interventions is jesuitical slight of hand. Frank's swinging Coase around like a thurible is liturgical - the real question is: when is it morally justified to participate - or merely acquiesce - in coercion in order to obtain the ends sought after by the powerful? Consequentialism per se is not exciting, but consequentialists who avoid the topic of coercion and state violence in the pursuit of preferred outcomes are ultimately juvenile fantasists. Frank's example, in which he says, "I wouldn't tell someone he couldn't smoke" (no,no, that would be beneath his exalted station as philosophical tut-tutter) - but then he lauds taxation of cigarettes, - is an exercise in begging the question, because he simply displaces the nexus of the violence from the moment a guy lights up to the moment when cigarettes should pay a tax.

The Elven Jedi writes:

I find it odd that the discussion of there being no clear precedent of who the "guilty" party was [confectioner vs. doctor] seemed to assume some kind of vacuum. Whoever is imposing some unforeseen change is clearly the "guilty one", are they not? If the doctor is going to be setting up shop next to the already established confectioner, then he should be informed of the noise, and then be able to make his choice.

In short, what is the purpose of discussing a situation which could never exist in reality? [both shops popping into existence simultaneously]

Ron Crossland writes:

Lively & wonderful. Spirited but civil. Terrific for engaging the mind and helping explore my biases and mental models.

Two thoughts - what two free individuals negotiate (which was the most basic model used throughout) is unlikely to produce a resolution helpful to the entire community in which the two individuals live. In today's world, thinking about solutions between individuals without parallel consideration for how this would affect interactions for the group(s) in which the individuals live is simplistic. Too many intertwined considerations. Try running a home owner's association for experience.

In terms of smoking - if you look at smoking as an individual right, then the comments concerning caution on government intervention have merit. If you look at smoking as a hazard, then a case can be made that only the government can approximate an answer best for the general community.

Seth writes:

Sorry if this is remedial, but I wanted to see if this thought is off base or so well known that it doesn't have to be clearly stated.

It occurred to me while listening to this podcast that Coase's reason for the existence of firms (reduce transaction costs) is also the reason for the existence of government.

And, transaction costs are really his "enduring insight", that both (firms & govt) emerge as efficient ways to solve the mutual problem between two parties.

Now, of course, that doesn't mean they stay efficient.

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