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Margot McConnell

Throughout the article, I was reminded of a lot of concepts we learned about in microeconomic theory in terms of transaction costs and the overall market failure of externalities. I kept being reminded of the production of coal and the extreme negative externality that is has. Coase makes a good point when he talks about how it is easier to think of factors of production as rights, and when you think of it in that way, you understand why certain things should be wrong and limited like coal mining. When coal companies exercise their right to employ workers and mine for coal, there is a loss suffered somewhere else. Here, it is the environment and human health/lives. The effects of coal mining was really what drove home to me sophomore year in the Sustainable Development class just how bad negative externalities can truly be just when thinking about human health, which makes it more tangible and easier to relate to sometimes.
The actual cost of mountaintop removal when all of the costs are internalized is very expensive especially because of its negative impact of human health. A common misconception is that coal is a cheap form of energy; however, that is without considering any of its negative effects. Communities especially in West Virginia suffer from increased prevalence of cancer and cardiovascular disease as a result of being located near areas of mountaintop removal. Also, studies have shown that pregnant women are at an increased risk of harming the baby just by living in communities where mountaintop removal occurs. Not only are community members affected by this but also the workers themselves.
Many supporters of Trump argued that his plan to save the coal mining industry would secure jobs for people that otherwise might not have one especially in rural parts of West Virginia where coal mining has been part of people’s lives for many generations. These people failed to see the real negative impact it is having on the people that actually have to live in the area and work in the mines. People living in Lexington, Virginia can freely use coal and find it to be “cheap,” but they are not bearing the endless negative health consequences like those in West Virginia are. Instead of creating and saving jobs that are doing more harm than good for people living in these areas, it would be better to find a solution that involved creating jobs for these people that did not involve coal and In general did not harm their health.

Mikki Whittington

I found it interesting to read this article in retrospect to chapter three of the textbook. Chapter three of the textbook establishes the arguments made against Coase's theory, namely that he examines two-party disagreements and fails to acknowledge transaction costs. The four legal cases presented by Coase in favor of his theory originally stuck out as falling to the arguments against this theory: all of the cases involve two parties and due to fees associated with legal proceedings have high transaction costs. Coase could present the argument that if the parties involved in each legal proceeding opted to come to an economic agreement before seeking legal mediation, then no transaction costs would have occurred, and his theory would still hold that intervention is unnecessary. However, Coase's whole argument is based around an assumption that an economic agreement will be found without legal intervention. In this sense, the presentation of court cases demonstrates that even between two-parties, much less when hundreds or thousands of parties are involved, an economic agreement cannot always be met "over coffee", and legal intervention is required. In this sense, while Coase is attempting to prove his theory, he is also providing evidence against his theory.

Mikki Whittington

I wrote the above post before reading section six of this article, whoops. However, I suppose I will respond to my own comment now that I have read further. My interpretation of chapter 3 was that Coase does not believe there is ever a reason for government/legal intervention. However, in section six he clearly establishes that there are occasions where government intervention results in the most efficient outcome. Except Coase immediately follows this with saying that if the costs outweigh the benefits, nothing should be done. I feel like this perception is at the root of our environmental crisis. For too long, not enough value has been attributed to the protection of the environment and the benefits that a protected environment have on human health and well-being (at least by a large number of people/firms), yielding the excuse that the cost of switching to more environmentally friendly production methods and technologies outweighed the underrated benefits.
On another note, Coase points out that legal proceedings have determined that what may constitute a nuisance in one place may not constitute a nuisance in another, and he does not attempt to refute this. An example is presented in which a fish n' chips shop is opened near wealthier homes and is considered a nuisance, but once it is moved to a poorer location it is no longer considered a nuisance. While this may prove to be the economically efficient solution it is not a morally sufficient solution. Many operations considered a nuisance have adverse health effects (location of tolls, smoke stacks, etc.). Wealthy members of society have the socioeconomic privilege of lobbying against the establishment of these nuisances in the vicinity of their neighborhoods, but the poor are not afforded this luxury. As a result, impoverished neighborhoods are disproportionately affected by nuisance operations that are considered to be "less of a nuisance" because of their location within an area of poverty.

Bridget Bartley

In reading this article, I learned about a lot of extremely specific cases in which Coase was able to get his points across. Instances he wrote of made sense for ideas he was trying to explain and get across to the reader. I will not lie; he had me fully convinced at some points in his paper. After reading, I look back and am constantly reminded of our universal answer to questions like should the government intervene: it depends. Coase wrote of a lot of cases in which it makes sense to discuss “not what shall be done by whom but who has the legal right to do what” (Coase 15). However, in most instances, there are other things to consider. For example, in regard to the case of factory smoke having harmful effects on occupying neighborhood properties: yes, making the factories solely reliable for social costs in turn harms the factories. And, yes, maybe the factory still possesses the legal rights to still produce their goods. However, never was it mentioned the possibility of factories maybe enacting alternative production methods with less smoke emissions at potentially the same output levels. I feel that technological development plays a large role in many of these modern conversations as alternatives emerge and that Coase completely left their impact out of this discussion. While I think there are cases that support Coase’s arguments very strongly, I think there are also cases that should be approached differently. There is never a catch-all solution to issues as multi-faceted as government intervention, and I think that each case should be treated as uniquely intricate as they are in reality.

Matt Condon

While I think that Coase makes many strong points and has some insightful observations, I believe that his theory is not necessarily wrong, but would only apply in incredibly specific circumstances. One issue that could arise nowadays with this issue is that the party being harmed by the negative externality may also be benefiting from the production process causing the negative externality, so they may not demand compensation or change. One example of this can be seen in the coal mining communities of Appalachian United States, where the coal mining process can cause considerable damage to the lungs of those working in the mines, but the miners will not object at the risk of losing their job. If the miners lose their job with the local coal company, it could be detrimental to their livelihood, as working in the mines is often the sole occupation available in the area. This means that the miners would rather live with the health consequences of the negative externality of toxic air than risk the coal company struggling in the face of the negative externality. One other issue I noticed about Coase's argument is that it falls victim to drastic oversimplification. While setting up each individual scenario, Coase walks the reader through a long list of assumptions that must be met, yet are rarely ever met in real world applications. One assumption is that the dispute must be between two substantive, material groups that are capable of voicing their dissatisfaction. While this can apply to some issues of environmental degradation, many of these problems are between one private body, whether that be a corporation or otherwise, and a natural resource or landscape that cannot be represented by one individual person, organization, or corporation. For example, when oil drilling in the Gulf of Mexico leads to pollution in local waters, it can be difficult to see the application of Coase's ideas, as no single organization can be responsible for representing the needs of the ocean as a whole.

Patrick Sullivan

After reading this article, I was constantly thinking back to when I first learned about Coase’s theory in my Microeconomics class. In that class it all seemed so simple and in a perfect world made sense. As we have briefly talked about throughout the beginning of this class, there are many intricacies that also come along with properly handling externalities. The hardest part of dealing with these externalities is deciding who is actually to blame for the cause of them. Coase postulates that it is not solely either parties’ fault in any given instance (Coase 13). While Coase takes fairly simplistic black and white cases to describe his point, I think he makes a sound argument. The issue at hand with Coase's theory is in its contemporary application. The issues at hand in today’s world are wildly different than that of Coase’s. He was not dealing with the radical multifaceted problems that now arise in dealing with externalities. The societal benefits/costs were of less of a concern when he wrote this in the 1960s, than they are now. I think that Coase may now agree with cetain levels of government intervention taking all social and economic costs into account. He would be cautious to say how much intervention should take place but would understand that it is a necessity given our circumstances. Coase interestingly was not even awarded any laurels for his efforts until some 30 years after his theory was published. This just goes to further the point that this piece must be taken in context. Many in the 1960s viewed what Coase theorized as a given or common sense, only later did we come to realize the importance of his theory. As with many economic theories, like the invisible hand, they work in a perfect world. As we get farther and farther from the conception of these ideas and theories, and deeper and deeper into the ever more complex world we live in, the less practical they become. The problem now hinges upon if there is a theory or policy that can wrap a solution in a nice little bow, or must everything be handled on a case by case basis.

Jacob Thompson

Reading Coase’s writing, I couldn’t help but think that some of the examples he used to support his ideas and refute those of Piguo were rather outdated. One particular section that I found interesting was his introduction of how to determine a nuisance and then who is liable for said nuisance. After reading about it, I immediately thought back to our class discussion on the destruction of the dam in the Maury in Rockbridge county and how Coase’s theorem is heavily dependent on simplified situations that do not apply to modern problems. This led me to consider the potential nuisances that were created by the dam before its destruction, and possible nuisances that could arise now. In doing so, I realized the true difficulty in determining what can be considered a nuisance and what cannot. For instance, while some may argue that the dam created safety issues and was harmful to the ecosystem around it, others could argue that the dam was crucial to recreational activity in the river. Thus, the question of which of these nuisances is more important is posed. Here is where I found a bit of a problem in Coase’s theory, as in many of the examples he used, a nuisance was determined in a legal form rather than the best economic choice. Additionally, there are many factors surrounding the destruction of the dam, such as the difficulty of recreation, that don't fit within Coase's simple examples. I felt that the determination of a nuisance was too subjective, and the outcome of the problem relied too heavily upon legal officials, such as judges. After reading the essay, I’m left with the question of whether or not there is a more effective procedure to solve problems such as the destruction of the Rockbridge dam in an economic fashion, or will it remain a matter of opinion and legal procedures?

Adam Harter

While reading this, I kept coming back to the difference between the abundant examples of nuisance Coase lays out and carbon emissions. Chiefly, the difference between a factory emitting smoke onto a nearby population and all of the factories of the world emitting greenhouse gases and contributing to climate change. In Coase’s example, it would be entirely up to the factory to decide how much smoke it wanted to release into the air. From there, the households directly affected by the smoke would be able to negotiate and receive compensation for having to deal with the nuisance. Coase believed that the government should only ever play two roles in this system: not allow certain methods of production and confine business to a particular area of operation. If the factory was taxed in the Pigouvian manner, then it would be reasonable for the factory to place a fee on the nearby households to pay it. He argues and believes in this method, all in the idea of maximizing the production in the economy.
Published in 1960, I do not fault Coase on not knowing the damages of carbon emissions on a global scale, but since this is now common knowledge, it introduces several flaws in his ideology. When a factory emits greenhouse gases, it does not just affect the neighboring households and contributes to the global problem of climate change. No firm in the world is equipped to be able to negotiate with every person in the world on the proper payment for the damage it causes. From there, it could be argued that the firm simply pays their national government the adequate amount for the damage they caused. But, the emission of greenhouse gases is not like the corn farmer that will still get paid the same amount no matter how much of his corn gets destroyed. The damage that the emission of these gases cause is incredibly difficult to reverse. So, in this case, there is no second party that is receiving compensation, but a whole planet that is being ravaged while firms can go about their business in the ways they see fit. Carbon emissions and polluting the oceans as another example I can think of turn the idea of a nuisance from a local problem to a global one and is why I do not see the economics put forth by Coase as adequate.

Allie Case

Coase uses numerous case studies to make some interesting arguments about potential solutions for dealing with negative externalities. However, by the end I disagreed with a couple of his points. First, while I understand that behind any simplified model there are assumptions to be made, the lack of transaction costs he spoke of for nearly half the article is nonexistent in the real world. Even Coase calls this assumption "very unrealistic" (Coase 15). When he brings in questions of legality, you once again see the flaws in a theory that as soon as it is confronted in court cases it may not follow what economists believe should happen (Coase 15). Specifically from the paper, I wish I better understood his disagreements with Pigou's theory (section 8 of the article). Understanding his oppositions to Pigou while lead to better apprehension overall of Coase's theorem. The main thing I disagree with is that overall, his theorem seems to lack urgency. He writes, "All solutions have costs and there is no reason to suppose that government regulation is called for simply because the problem is not well handled by the market or the firm" (Coase 18). At this point, I don't think we have time to let things work themselves out. We might as well try stricter government intervention because already we've seen irreversible damages due to climate change. On a similar note, he writes "what has to be decided is whether the gain from preventing harm is greater than the loss which would be suffered elsewhere..." (Coase 27). Again, I'm not sure at this point what loss there would be that we're trying to avoid. Although yes, it would fit the model, we don't have time to wait for markets to balance out and not immediately try and lower pollution emissions.

Overall, I'm extremely curious how this theorem stacks up in modern society and specifically with the current administration. Is this economic theory partisan? Coase hints at it slightly, saying "...the Government is likely to look with a benevolent eye on enterprises which it itself is promoting" (Coase 27). In general, do we see one party leaning in a particular way for government intervention in environmental resources, or does it depend specifically on the market?


An important point mentioned is that both parties involved in the transaction are causing damages. This is contrary to the common media message that one side is to blame for a certain problem and the other side is a victim. The solutions to many problems depends on whether the cost of continuing one activity is less than the damage that would otherwise occur. In that instance, it would be possible for two opposing parties to come to a mutually beneficial solution. In may of the early examples, this solution would involve monetary compensation for the use of land, the making of noise, the creation of an unpleasant smell if the parties agreed; however, I am not completely clear on the best way to relate this to the problem of unintentional pollution or damage to ecosystems. It appears to me that there would be a large amount of resources spent in order to put a monetary value on destruction of ecosystems (scientists would need to simulate and study the absence of a certain member which could result in detrimental effects or no effects at all) and facilitate conversations between the opposing parties to reach a mutually beneficial agreement. The main issue I find hard to comprehend is the idea of doing a cost benefit analysis on the environment; I feel it would be incredibly difficult to convey the negative (or positive effects) of actions which are often created by someone removed from what they are harming. But I guess that is the barrier to many effective solutions; how does a governing body best intervene in private matters, such as production, in search of a meaningful solution?

Steven Black

Coase utilizes many examples to illustrate different potential outcomes and possibilities for disputes over damages caused by neighbors. I have generally thought of it as the one who causes the damages should be the one to pay for them; however, it was interesting to compare those situations with the possibility of the victim paying the guilty party to reduce their damaging behavior. I am not sure if that will be the most practical. As mentioned in Adam's comment, many of the damages to the environment, such as carbon emissions, affect many people and negotiations involving everyone would be very costly. Additionally, paying firms to reduce environmental damage might incentivize them to take initial points with very high emissions levels to capitalize on their ability to profit from reducing them. However, I believe a government subsidy for firms that can meet certain specific emission standards would be better than no action at all. Additionally, Coase discusses how any action that reduces the initial deficiency is often seen as beneficial, but this may not necessarily be the case. We need to make sure that any corrective actions do not cause harm that is more damaging to society than the initial deficiency. As an extreme hypothetical example, if the solution to reducing fertilizer runoff into streams was to simply stop growing crops, then the new problem of food shortages would likely outweigh the gain of reduced fertilizer runoff.

Valerie Marshall

Like many of my classmates have noted, Coase presents numerous specific court cases that make for compelling arguments in favor of his position. I found his argument particularly interesting for the case Bryant v. Lefever, where the plaintiff complained that his neighbors' renovation to their house affected his chimney so that when he lit a fire, the smoke collected in his house rather than escaping. In this example, Coase argues that the defendant cannot completely be blamed for the entrance of smoke into the plaintiff's house because if was also the plaintiff's action of lighting the fire that brought smoke into his house. Therefore, both the plaintiff's actions and the dependent's actions are equally responsible for the collection of smoke in the house. Since both parties are at fault, any effort to remedy the problem should rely on the pricing system, not government intervention, which will affect both parties equally. It is clear form Coase's paper he believes Pigou's solution to pollution is government intervention that negatively affects the polluter to an unfair degree. While I see the point Coase is making, and it does work for his specific example, I wonder how far his argument of two parties being responsible for the nuisance would go. In many modern cases, individuals or firms are polluting in ways that cause negative health effects to millions of individuals, who could only be deemed responsible for the nuisance because they are breathing air and drinking water. In this case, would Coase still label them as partially responsible for the nuisance of pollution? Could such pollution that is having extreme negative health effects on individuals even be labelled as merely a nuisance? Coase's case involves rather minor effects of pollution on an individual's life, ignoring the fact that pollution can lead to such negative effects as infertility or cancer. I recognize that this science was likely not available at the time he wrote this paper, so maybe his position would change with our current understanding of pollution's effects. Or maybe he would argue people are consuming the goods produced by the polluter’s factory, so the individual affected by the pollution is still partly responsible because of their consumption habits.


While reading this article, I was particularly interested in the case of Delta Air Corporation v. Kersey, Kersey v. City of Atlanta. In the case, the Hartsfield-Jackson Atlanta International Airport was built next to Mr. Kerseys home. The noise from the movement of aircraft taking off and landing “rendered his property unsuitable as a home”(25). In court, Mr. Kersey lost his case when the judge stated, “the conditions causing the low flying aircraft may be remedied… but it is indispensable to the public interest that the airport should continue to be operated in its present condition, it may be said that the petitioner should be denied injunctive relief”(25). Due to the fact that my home city of Chicago is home to O’Hare International Airport (6th busiest airport in the world by passenger numbers) and that avation is one of my interests, I decided to look further into this problem. I discovered that many airports around the country have come under increased public scrutiny in regards to the theme of noise pollution and have attempted to remedy this issue. In the 1950s, O’Hare was built in a farming community and the problem of noise pollution was minimal due to the fact that propeller planes were relatively quiet and the population affected was small. However, in the 1970s and 1980s louder jets became increasingly common and urban sprawl led to the construction of communities directly adjacent to the runways. To help combat the problem of noise pollution, O’hare created the noise management team which, “recognizes that neighborhoods surrounding O’Hare International Airport (O’Hare) are affected by noise from aircraft operations. We are committed to minimizing these aircraft noise impacts on the neighboring communities. Over the years we have engaged stakeholders to develop and implement noise abatement programs, sound-insulate homes and schools, and explore new elements intended to enhance and improve our noise programs”(Chicago Department of Aviation). After initial research, the team concluded that most of the noise generated came from arriving and departing aircraft. As the slope and speed of arriving aircraft cannot be changed due to safety thresholds, the team focused on departing aircraft. They discovered that the industry standard involved departing aircraft climbing slowly away from the runway due to the fact that this was the most fuel efficient method. However, this also led to noise pollution extending far beyond the end of the runway as the aircraft remained close to the ground. At the recommendation of the team, in 1996 O’Hare implemented a law where aircraft were required to make a much steeper climb out of the airport at a lower power setting(Chicago Department of Aviation). This reduced noise pollution due to the fact that departing aircraft were much higher over communities next to the airport. Unfortunately, this approach uses more fuel compared to the old method. This interesting discussion of how to balance noise, fuel efficiency, and most importantly safety is ongoing and will continue to be debated for years to come at airports around the country.

Chicago Department of Aviation. “Airport Noise Management System.” Flychicago, www.flychicago.com/community/ORDnoise/ANMS/pages/default.aspx.

Chicago Department of Aviation. “Airport Noise Management System.” Flychicago, www.flychicago.com/community/ORDnoise/ANMS/pages/default.aspx.

Maisie Strawn

I would love to discuss in class the implications of Coase’s theory on environmental justice issues. As far as I could tell, Coase does not consider issues of equity or justice at all in the paper except to set “questions of equity apart” (pg.19). I would imagine that these sorts of issues may not have been as large a part of the conversation in 1960 as they are in the present. But to me, knowing what we know now, it seems irresponsible to set “questions of equity apart.” The examples Coase gave in the paper were all very simple, which helped me in understanding the basic tenets of his argument but left me a little confused in how it would work in application. It seems to me that under Coase’s theory poor people who live next to some giant polluting industry and are getting sick from it, and cannot afford to pay the industry whatever amount would make them stop polluting, should just be expected to move somewhere else. This feels intuitively wrong in both an ethical and efficiency sense. Or, like in the case of greenhouse gas emissions, what if the person who is going to be harmed by some pollutant does not exist yet to bargain with some firm? It does not seem that Coase’s ideas allow for any sort of intertemporal negotiation, which is hugely important in terms of environmental issues. Greenhouse gases emitted today will affect generations of people, and so many other pollutants can persist in the environment for decades if not centuries to cause harm to future people. My final thought, and this is a little bit more out there, is that there are entities (plants or animals) but maybe some people too, who cannot negotiate in monetary terms but are still affected by pollution and might like to negotiate if they could. In a similar vein, it seems that the negotiation process leaves a lot of room for people to be taken advantage of us and requires really good information for both parties, which often times is not available.

Noah Gallagher

I would absolutely love to learn more about how the courts decide who is liable for a negative externality in a case, like the doctor and the confectioner, where multiple parties may be responsible for the conflict. I think that we often see these sorts of conflict in real estate and other industries where an incoming party disturbs a previously existing party. (A skyscraper with a view may sue when another blocks their view, etc.) Pricing systems to resolve these disputes may be possible, but they get more complicated as you include a myriad of culpable and impacted parties. For instance, my high school was located not far from several large feed lots, mostly chickens. On days when then wind blew the wrong way, the area smelled terrible. This was certainly a negative externality, but it would have been incredibly difficult to calculate how many people were impacted by it. It also would have been incredibly difficult to calculate who was culpable for the negative externality: which farmer's lot was the smell coming from? Nobody ever knew. These difficulties, among others, highlight some of the flaws in a solution such as Coase's. Without knowing the full impact of an externality, it's difficult to price it in, and would be even more difficult to negotiate a compromise or settle on a fair price.
I'm also concerned that a sort of "figure it out on your own" standard would often result in the larger, more powerful party winning, because their price is bound to be higher than the price of the smaller party. An oil company would likely need more money to move their operation than a rancher. In cases such as these, there could be a significant benefit to government involvement.

Max Gebauer

An ironic point in the article for me was near the end of the article when Coase is leveling a set of arguments highlighting some difficulties in calculating the size of the externality as it relates to finding the correct level of taxation. It's decidedly ironic because this very argument applies to Coase's proposed "system" of dealing with externality. Why should he have privileged access to simple examples like cow costs 3, field of crops costs 10, then argue that if trying to level a tax on an externality you'll have an incredibly hard problem on your hands. It's not to say that it's easy to calculate damages in many cases, but it's a task that must occur regardless of one's preferred system of dealing with it. On a second, unrelated note, I think there are serious distributive and justice-based concerns with this approach. In many of his examples, even assuming that the result he describes would occur, does this really seem like a desirable outcome? It certainly appears that, especially in the absence of property rights, the world devolves into a system where you can basically destroy others property and make them pay you to stop but at least it's "efficient". Of course, following Sen we could ask the question "Efficiency of what?" Changing the focal variable changes the recommended course of action and that ideal arrangement. Finally, his arguments concerning the courts role it decided cases dealing with externalities seems to both advocate for some form of legal realism while also denying its existence as arguably the dominant paradigm, even at the time of his writing.

Lauren Paolano

Coase references multiple examples and specific court cases to demonstrate possible outcomes for disagreement over damages caused by neighbors. I found it interesting to read each example and take a step back to think about who I initially would call to blame and then think again while taking into consideration their socioeconomic background. Sturges v Bridgman was a case where a quiet doctor and a loud sweetmaker disputed over who should have to move neighborhoods. Coase's opinion on the case was that no matter what the judge ruled, the sweetmaker had to stop using his loud machinery or the doctor would have to live with the noise, the two neighbors could come together and negotiate a contract that leaves both individuals happier than they were before. This seems like a fair way to settle the issue, but if the doctor was really unhappy with his current lifestyle, I think it would make most sense for him to move to a more secluded neighborhood, where he could enjoy his peace and quiet. Similar to what Maisie said, negations might seem like a simple solution for the short term, but looking in the long term in other cases regarding greenhouse gas emissions, it is more important to analyze the long term consequences. This is where the government plays a role in regulating laws in order to reduce pollution to minimize serious health hazards that have been continuously ignored. I think there has to be some middle ground with finding solutions regarding command and control approaches and economic incentives. Economic incentives are beneficial as long as the pollution tax or subsidies are strong enough to hinder the amount of consumption.

Christopher Watt

One of the things I found most fascinating about Coase’s perspective on social costs and externalities of economic arrangements and productions is his consideration of those social costs as factors of production rather than truly external to the production process. The pricing of social costs, be it pollution or lost crops from his original example, is considered as a direct cost of production. What must be determined is who and how to bare that cost. I have never thought of transaction costs in this light; I have always considered them as an external effect of production that is most simply a harm or benefit to third parties rather than a cost able to be priced and paid directly by either the producer of the cost to the third party, or something the third party may have to pay if the producer is not considered liable. With this consideration in mind, I had trouble with some of the discussion on liability, particularly in cases where the cost was forced to be carried by the non-producing party when there were net societal benefits to production. It seems to me that groups forced to bear pollution costs, for example, ought to receive some compensation, even if they in some way benefit from the final goods produced. This draws a matter of equity in the distribution of costs and benefits into light. I would love to further discuss the distributional equity piece of Coase’s perspective in class.

Lucas Roberton

I found the case studies in the beginning of Coase's piece to be very interesting. However, one issue that has come to mind when considering the general idea of the problem of social cost is that when it comes to negotiating the costs of reducing damages, there is no way to anticipate the future value of certain goods. Because of a certain lack of flexibility when it comes to reaching legal agreements for the costs of damages, it could very easily come to a point where a good's value changes very quickly, but the damages paid to the producer are not changed. For example, assume that in Coase's example of the cattle farmer and the crop farmer, the crop farmer is receiving $3 in damages that the cattle farmer is paying in order to have the extra steer. If suddenly an invasive species comes and destroys half of the crops, this would cause a shortage of crops, making them much more valuable. Now comes the question: Should the cattle farmer have to pay double what he originally did in damages because of the change in valuation? While I understand this example is a very short term problem, it certainly would discourage joining the crop farming industry if they are not better compensated for the damages. However on the flip side, should the cattle farmer have to pay more because the crop farmer has a worse yield that year? It would seem unfair to force that cost upon him. The point that I am attempting to make with this example is that there are many factors in the problem of social cost, and there are many ways they could be approached. Now, when we look at the costs on the environment, it becomes a whole new monster. We must now consider whether production of goods are worth more than health and safety to both the environment and in many cases to human life. Again, the issue of valuation comes up. A pollution permit today may be worth 10 times its value depending on how bad air quality is at the time. I would like to hear my peers opinions on this issue in class.


Coase’s paper “The Problem of Social Cost” discusses and expands upon many principles which are familiar to me through my exposure to them in other economics classes. I find that the discussions of the legal repercussions of social cost issues such as the example of cattle-raiser and the farmer and doctor and confectioner are fascinating and grant an interesting insight into how differently economists and the law view certain issues. Of course, whatever economists think will not be instantly made into law, nor should it, but considering the pressing matter of global warming I’m wondering if economics should be added into legal codes regarding these types of laws. I also wonder if there has been any development in the previous 60 years since this article has been written in any countries and whether so called “climate justice” is the correct way to deal with and penalize those responsible for the situation we find ourselves in today. There have been numerous lawsuits against fossil fuel corporations (https://www.vox.com/energy-and-environment/2019/2/22/17140166/climate-change-lawsuit-exxon-juliana-liability-kids) and the movement is beginning too pick up steam in many countries around the world regarding the legal responsibility of what these companies knew and when and how their action and inaction led to the current crisis. I also think it is important to think about the tradeoffs that occur when people, like the cattle-raiser, pays to destroy or hinder the production of another good, like a crop. This same logic obviously applies to a situation like pollution where say co2 is emitted in exchange for energy output. The issue with the assumption is that some things are valued at more than say their market price. With co2 emissions we are introducing chemicals in the atmosphere that will have lasting, significant, and widespread impacts. Therefore, even with a level of carbon tax it can be argued that overall welfare is still decreasing despite the punitive measure. Herein lies the issue with the problem of co2 pollution. While there are regulations in place to prevent or limit some forms of harmful emissions, nothing for co2 exists. Therefore, the cost of say a utility company who provides power by burning coal is not made to internalize the total cost to society as a result of their actions. This applies to many of our activities and purchases. I wonder how much more things like iPhone, laptops, TVs, appliances, and clothing would cost if all direct and indirect costs were reflected in the retail price

Transaction costs are a classic aspect of economic externalities. It is something that needs to be carefully considered and logged. However, assuming null or very low transaction costs can be helpful in that we can begin to understand other aspects that play into economic decision making and outcomes. At the end of the day environmental economics largely boils down to cost and who is bearing it.


These first couple of classes and this reading have very much made me think about the interactions of businesses in ways that I have never thought of. I found Coase's argument to be very very clear and effective as a result of the structure. Coming from an accounting background, this idea of the "guilty" party paying the other party the amount of the damages caused is interesting, especially when it comes to it becoming part of the company operating success. For example, the idea of a business losing money at its core, but being profitable as a result payments from the guilty party.

I found Coase's criticism of using taxes to reduce social costs to be very compelling and logical. While a tax can obviously be an effective way to try to limit a company acting in a harmful manor (relative to another business), in reality it is not a cost free approach. This tax may sway the company away from acting destructive, however this money that is being taxed does not directly go to the party that is being negatively effective. This makes it a very difficult approach if the goal is to find a cost free solution. Tax being used in this way is purely concerned with limiting something that is seen as "bad", but it doesn't take into account the overall social perspective.

Nikki Doherty

Coase seems to urge us to redefine and re-visualize “factors of production” to be rights, more than just inputs that firms use (Coase 44). By doing so, he repositions Pigou’s view that the harmer should be at fault for damages to his reciprocal view of issue at hand: A’s action harms B, but if we restrict this A’s action, B’s action harms A. I believe this repositioning adds credibility to his argument that the market can reach efficient allocation regardless of each party is liable for creating the harm. It also adds credibility to his claim that bargaining will be pursued until an efficient and optimal allocation is reached. In the lens of environmental issues however, I am less convinced of the above. It is hard to imagine how the environment might be able to prevent the damage afflicted to it (ex. a doctor may be able to move to another room, but a fish cannot move to an unpolluted stream). Further, property rights become more difficult to see and claim for things like natural resources, leading me to question how optimal allocation achieved via bargaining. Coase oversimplifies situations with social costs as all his examples suffer from similar unrealistic assumptions. For instance, in each case presented, each party has sufficient information on who the other is—they know exactly who to hold accountable and how to do so. His arguments are contingent on the “individual hardships” that are voiced and acted upon (Coase 9); however, what happens if a negative externality effects the masses or a part of the ecosystem? Who defends the rights of these bodies? The issue in both instances of shortcomings (regarding the application of Coase to environmental issues) may be considered agency. At what point is another party able to be an agent for the environment, and who should this be? Moreover, Coase relies on a world without transaction costs. Coase does recognize that a world with zero transaction costs is unlikely and when transaction costs are in fact particularly high, government intervention may be warranted. Government intervention may be costlier than “the more serious harm” (if we take serious to mean a cost-benefit analysis like Coase does) (Coase 2). If we take serious to mean moral seriousness, then government intervention in situations of negative externalities like pollution may more likely be the best solution to social welfare.

Sydney Goldstein

Earlier in this class it was mentioned how important it is for interdisciplinary relations between economists and environmental scientists to exist. This is because economists that hope to study the environment and work in think tanks involving environmental policy need at least a rudimentary understanding of the science behind the phenomenon they are attempting to describe. It can be especially important to understand the science of deforestation, for instance, to determine the potential future benefit of having a forest versus having timber. It is also important for environmentalists to understand the jargon of the economist so that they are not left with the impression that economists are evil and do not care about the environment, which as explained in the article we read by Fullerton and Stavins, is a common held belief among the general public. But, the interdisciplinary nature of environmental economics is much more expansive than just dealing with the necessary interactions between environmentalists and economists since politics is also largely involved. As Coase explains in his work “The Problem of Social Cost,” explains that legal reasoning may not always align with what economists would reason due to the fact that economists can deem certain factors irrelevant or equal that due to precedent or legislation courts cannot. It is for this reason that legislation must catch up to economics. Coase proposes direct government regulation as a means to solve social costs associated with negative externalities such smoke released from burning oil or coal. He asserts that the government, in essence, is a “super-firm” due to the fact that it can influence the usage of factors of production through administrative decision. Although it is true that the government has potential to enact legislation via congress (both at state and national levels), this ability of the government to directly regulate negative externalities that lead to social cost is limited due to the nature of politics and bureaucracy. For instance, politicians are subject to making decisions that are ludicrous to an economist due to the pressures they are facing from constituents who are apart of uneducated masses looking for short term relief. For instance, it was discussed how McCain and Clinton proposed to suspend the federal excise tax on gasoline despite the fact that in the long term there would be increased social cost to this action. In reality a better policy would be to cut income tax so that people would have more spending money with which they could choose to spend on gasoline and internalize the externality or consumers could choose to spend it elsewhere (say on a fuel efficient car) and decide that they do not want to internalize the cost of the externality of gasoline. Another complicating factor of politics is that nowadays politics in general has become so polarized that even proposals that are moderate or mutually beneficial get shot down because legislators only want to tow the party line. It is often seen that policies involving environmental legislation are shot down as being “crazy” leftist despite the fact that they could contain a fairly moderate approach (or even something that in the 1990’s and early 2000’s would have been considered a Republican approach). This creates situation in which solving social costs can take so long that by then the damage may be irreversible. It is possible that due to nuances of politics, legislation and thus legal reasoning may never be able to appropriately address social cost involving environmental issues. For this reason, I propose that more resources be spent on proper education of the masses regarding social cost thus an educated population can make informed individual decisions as well as potentially vote for candidates who are making informed assertions regarding social costs rather than what is providing immediate relief. This would pave the way for effective legislation to be passed.

As one last additional thought, I would also like to point out that even if the US was somehow able to fix its legislation overnight in order to perfectly adjust for all the negative externalities in the US, the global market would still not be fixed. A problem such as global warming that impacts the globe cannot be solved just by one country and thus a larger force (for instance WTO or even a new international organization created to implement environmental regulations) would be necessary. If this does not happen it is likely that problems such as the free rider problem would occur wherein country A would limit pollution therefore country B decides that it now has more leeway to pollute.

Olivia Luzzio

Coase’s argument that decisions concerning environmental externalities and social costs should be made by evaluating the total effect of different social arrangements on society makes sense from an economics standpoint. However, as we have discussed in class, total cost can be difficult to measure because it is hard to account for social costs, especially when it comes to the environment. For example, it is difficult to quantify impacts on human health, loss of ecotourism, and alterations of ecosystems, all of which are likely to suffer at the hands of negative externalities such as pollution. While interning at the Business Council for Sustainable Energy in DC, I witnessed standoffs between “dirty energy” interests and scientists from NASA and the World bank in congressional hearings. Environmental engineers and climate scientists were frequently shut down just because they could not produce the data to capture the environmental costs they were claiming.
Additionally, this article was written in the 1960’s. Arguably, the landscape and perceived impact of social costs has changed profoundly since. Perhaps the effects of carbon emissions were not as well known when Coase developed his position as they are now. In 2020, it seems ethically questionable to allow the Earth to continue to warm based on a cost/benefit analysis. It makes more sense to develop policies that address negative externalities by reducing them in order to prevent further environmental harm, rather than to allow these externalities to persist if they are deemed economically efficient.

Jack Citrin

I found it interesting that Coase placed externalities into the cost of the factors of production. In absence of transaction cost and given property rights, disagreements are left up to market agreements between the arguing parties. Many of the examples he gives between competing parties are simplistic (e.g. the farmer and the cattle-rancher, or the doctor and the confectioner) and it is clear that outside interference is unnecessary. However given todays climate of increasing world-wide pollution, it would be hard to find all the parties involved in a given issue and then have them debate who is at fault. Instead government interference would be necessary to solve complicated problems. However, Coase does not argue that government is never necessary. If transaction cost are high, then proper litigation and government enforcement is necessary if the market costs are too high. Coase states that the government can act as a super-firm in lowering overall social costs. In addition, I do agree with Coase that the court system does not always factor in proper economics. However i believe that in today's world courts are less bias than in the 60s. Overall in small scale situations, i believe that simplistic negotiation is proper.

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