In my column for the January 12th, 2011, edition of the Pittsburgh Tribune-Review I celebrated the great Nobel-laureate economist Ronald Coase (who just two years earlier had celebrated his 100th birthday; Coase was to live until September 2013). You can read my column beneath the fold.
The rights stuff
On Dec. 29, Ronald Coase celebrated, at his home in France, his 100th birthday.
If you’re like most people, you’ve never heard of this gentle scholar from England. But he’s a towering figure in 20th-century economics — so much so that in 1991 he was awarded the Nobel Prize in economics.
Unlike too many Nobel laureates, Coase never pronounces on topics that he doesn’t know well. He takes to heart a chief insight of that first economist, Adam Smith: The key to a prosperous society is specialization. We are productive when we each stick to our own knitting; we are disruptive when we arrogantly suppose that we can escape the limits of our own experiences, skills and knowledge.
Coase’s specialty is the economics and law of property rights. He brilliantly explained how private property rights give us incentives to cooperate productively in ways that went largely overlooked before he pointed them out.
Before Coase published his most famous article — his 1960 classic “The Problem of Social Cost” — scholars never realized that (as I like to put it) legal rights are like cars.
Everyone understands that if you value my car more than I value my car, you probably will buy my car from me. Even though I have the legal right to the car and you do not, the ability to transfer property rights means that the person who values the car most highly (you) winds up with the car through a peaceful process that adequately compensates the person who parts with the car (me).
Professor Coase explained that the same process applies not only to physical things like cars, coal and condominiums, but to intangible property rights such as the right to dam a river.
Suppose you buy a farm downriver from me and you want to use the river to irrigate your crops. Unfortunately for you, though, I have long dammed the river to create a picturesque lake. You ask me to remove my dam and I refuse.
So you take me to court. Again unfortunately for you, the court rules that I have the right to dam the river.
Before Coase’s 1960 article, the widespread belief was that, because the court declared that I have the right to dam the river, the river would remain dammed and you would be unable to use it to irrigate your crops.
In other words, the river’s use is determined by which party — you or me — wins in court. The only way that the river would be used to irrigate your crops (rather than to create my picturesque lake) would be for you to win a legal declaration that strips me of the right to dam the river.
Coase showed why this conclusion is wrong.
My right to dam the river is like my right to my car: I own it, but I’m also free to sell it. And I will sell it if the price is right.
If the value to you of using the undammed river to irrigate your crops is, say, $100,000, and the value to me of my picturesque lake is, say, $75,000, then you’ll offer to pay me to remove the dam. Just like I will part with my car if you offer me more money for it than that car is worth to me, I will part with my right to dam the river if you offer me more money for it than that right is worth to me.
“So what?” you might ask.
Coase’s insight shows that many disputes over competing uses of the environment can be solved privately without heavy-handed government bureaucracy. If private property rights are clearly specified, parties will then exchange these rights with each other so that those who value particular rights most highly are those who gain control over those rights.
To the extent that parties can bargain with each other for ownership of property rights, government officials need not take upon themselves the difficult responsibility of deciding just how the environment is to be used (or not used).
Of course, parties won’t always be able to bargain with each other. When this inability to bargain arises, a new set of practical problems emerges. But even here, Coase’s wisdom provides useful guidance for courts or government agencies that find themselves responsible for deciding how a particular environmental asset is to be used.
The “Coasean” wisdom advises these officials to do their best to determine how the environmental asset would be used if people could bargain. While such officials will often err in attempting to make these determinations, at least their guideposts will be the results that would be produced by markets rather than by special-interest groups.