Agricultural Economics

Tag: Coase

Air quality scares Pascagoula residents

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From the Sun Herald:

A neighborhood along Bayou Casotte, in the heart of the state’s most industrialized county, has been co-existing with industry for decades.

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But in the last two years, things have changed.

A sticky dust blows in and there’s a strong acrid smell that lingers day and night. Residents with heart or immune problems are reporting breathing issues.

Neighbors say when they mow their lawns, the dust that’s kicked up burns eyes, noses and skin. There is silica, cadmium, aluminum and other metals in soil samples. Smells persist.

Unfortunately the article doesn’t suggest any ideas about why the problem has suddenly appeared, or become worse, in the past two years. This is a classic externality problem, where production by industry creates a negative effect (air pollution) on a third party (the nearby residents).

Apparently the nearby industries have met with neighborhood representatives and have undertaken some actions, but one woman says that no one is taking responsibility:

She said Mississippi Phosphates came to her house with an air monitor to tell her the problem wasn’t theirs.

VT Halter shipbuilding has met with her several times. It responded to a call on May 14 and determined a smell she reported was not coming from Halter.

All the industry say they’re meeting air-permit requirements.

 

So one problem is that the source of the pollution can’t be identified, at least not by residents, without additional help. This makes it harder for different parties (the residents) to unite their voices against the polluter because the specific polluter is unknown.
A second problem is that the industries are meeting their air-permit requirements so they have little incentive to cut emissions further because it is costly to do so.
The Coase Theorem states that, under certain conditions, parties (here, the residents and the industries) can get together and solve an externality problem without any government or policy intervention. But one of those conditions is that the people negatively affected by the externality can get together and bargain with the polluter. Because the polluter can’t be identified, and because there are many people negatively affected by the pollution (which makes coordination challenging), this condition is hard to meet in this case. Policy intervention may therefore indeed be the best course of action…although I’m not saying there is or isn’t a need for it in this case specifically.

 

Ronald Coase, of Coase Theorem fame, Dies.

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From the New York Times: (Ronald H. Coase, ‘Accidental’ Economist Who Won a Nobel Prize, Dies at 102)

Ronald H. Coase, whose insights about why companies work and when government regulation is unnecessary earned him a Nobel Memorial Prize in Economic Science in 1991, died on Monday in Chicago. He was 102.

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He introduced the concept of transaction costs — the costs each party incurs in the course of buying or selling things — and showed that companies made economic sense when they were able to reduce or eliminate those costs by performing some functions in-house rather than dealing in the marketplace.

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In the second of his groundbreaking papers, “The Problem of Social Cost,” published in 1960, Professor Coase challenged the idea that the only way to restrain people and companies from behaving in ways that harmed others was through government intervention. He argued that if there were no transaction costs, the affected parties could negotiate and settle conflicts privately to their mutual benefit, and that fostering such settlements might make more economic sense than pre-empting them with regulations.

The paper made the idea of property rights fundamental to understanding the role of regulation in the economy.

The Coase Theorem is a central theorem in environmental economics.  It states that, in the presence of an externality (e.g. I’m yelling loudly in the Junction and you’re annoyed), if there is (1) low transactions costs (we can speak to each other easily), (2) perfect information (we both know the benefits and costs to each other of my yelling), (3) and clear property rights (either I have the right to yell or you have the right to not hear my yelling), the two parties can bargain and an economically efficient outcome will result.  An economically efficient outcome is one in which the benefits to society (in this silly example, that’s just you and me) minus the costs to society are greatest.

If the conditions for the Coase Theorem hold, it means that, theoretically, there’s no need for government regulation or intervention to resolve the issue (assuming all we care about is economic efficiency, that is).  The question is always whether or not the conditions hold.