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In our second class session we discussed the fossil-fuels industry as a subsidized sector. The result is a high cost product disguised as low-priced coal-power. The air as common source to all humans should ideally be in a breathable condition. Notice, this does not necessitate no pollution. There is a best possible point where private and public interest align for optimal social welfare. The Problem of Social Cost begs the question who should be allowed to harm whom? While reading the extended example of the cattle-rancher and the farmer, I was introduced to a new concept. The cattle-rancher had the option to pay the farmer to avoid growing a certain amount of crop. As long as the farmer earned more than his potential losses, both stakeholders were able to benefit from this transaction. The value of the crop is the net gain left over from the cost of cultivation. In the legal procession determining liability, the court’s rulings could have swayed in either player’s favor. The rational legal path does not necessarily align with the rational economic outcome. To me, it seems there is no defined avenue of solution. The answer is always dependent on a variety of external factors.This perceived failure is largely due to confusion. Additionally, in the first half of the text, there is a highlight of many specific cases that provide examples where only two visible stakeholders were discussed adding to the impracticality of it all. Although I have not developed a counter, I do not necessarily agree with his argument. However, I resonate when Coase mentioned there is a fundamental misunderstanding of economics. Whether it is the lack of basic economic theory or failure to translate theory into reality, I look forward to seeing a transition where more economists have an overarching consensus on a topic.


Coase’s “The Problem of Social Cost” outlines the issues created out of placing social costs on the entity held responsible. Coase stresses the “reciprocal nature” of what was—and I would argue still is—the most commonly proposed and obvious solution to this problem: requiring monetary payment from the responsible party for the negative externality. He argues this is counterproductive and introduces the importance of a set agreement between both parties for accounting all associated negative externalities. However, his idea that both parties should be able to account for the entire social cost assumes that they will consider all negative externalities beforehand and that there will be no transaction costs.

It goes without saying that these assumptions are—as of this moment—unrealistic. In most situations two parties are incapable of predicting all associated costs. With this being said, Coase acknowledges how both parties often do not have access to perfect information and how zero transaction costs are not entirely feasible. Even though his extensive cattle-raiser and farmer example made sense in the context of his argument, my own opinion is that humans are (unfortunately) too flawed and self-interested to achieve the level of agreement Coase uses in this example. It is inevitable that there will be situations in which one party benefits more than the other in an agreement, allowing for some costs to be wrongfully placed. However, these social costs—especially in regard to current environmental problems—need to be resolved in some way, and in a perfect world (or a model) Coase’s theorem makes perfect sense.

I want to learn more about how this paper is received and used in the field of environmental research today, and how the use of its ideas has changed (if at all) over the past few decades and look forward to discussing it in class.

Natalie Burden

I had expected more direct environmentally-focused discussion, but I realized further into the reading that the lack thereof was very understandable. Many of the damages associated with environmental economics occur on such a large scale that it would make it hard for readers to grasp the nuances of the problem. It was a good decision by Coase to start by explaining smaller-scale problems of externalities such as shade from new buildings over hotel pools. From that point, it was much easier to understand the problems that arise in attempting to fix the externality problem (transaction costs, regulation, enforcement, etc.). Describing these troubles on an individual- or firm-level made it very clear to me that addressing larger-scale environmental problems such as widespread pollution and the effects of greenhouse gases would be impossible to fix if they were left to individuals and firms that would each have to deal with their own transaction costs. Hence, the government, given its authoritative power, should intervene to dictate the use of factors of production, and in doing so, help individuals and firms avoid the costs from trying to fix the same problem on their own. Obviously, it is much easier said than done, as it is also very costly for the government to fix major environmental problems, and because many problems are not necessarily designated as problems, as Coase discusses in the section on the law of nuisance. My main takeaway was that in order to fix the major global-scale environmental problems, the authority of the government is necessary.

Ashley M Johnston

Throughout the article, Coase's logic, examples, and explanations highlighted the complexities of familiar economic principles and theories. One thing that surprised me was the relationship between "harmed people" and those that "harm" them. The example of the doctor and confectionist stood out to me since a lawsuit can be avoided if the harmer pays the harmed the cost of the loss as long as the payment is less than the losses that the harmer would take in a lawsuit. The causes the harmed to give up their right to prosecute and allows for harm to persist. In order for harm or damage to be eliminated, both parties' opportunity cost must be considered. Concerning environmental harms caused by firms, I have never seriously considered the necessary conversation that requires the harmed and the harm to discuss both sides' cost. I think that we should consider that not all environmental issues should be solved or harm reduced in the same way. Lawsuits and defining individual's rights to compensation and discussion between parties provide two routes of reducing harm. Depending on the circumstance, we need to have in mind that each battle needs a different strategy.

Ginny Johnson

While I am not sure I completely agree with everything Coase posits in this paper, I do really like his point that comparing a laissez-faire world to an ideal world is often an irrelevant exercise in looking for an actual solution and that comparing the current state of an issue to potential solutions and their total outcomes is far more beneficial. The idea that a solution might sound good, but actually do more harm than the problem it is meant to be solving is not an intuitive thought. It reminded, though, of the reason W&L does not have a green roof on the CGL. While the building was still under renovation, there were discussions about potentially putting a green roof on the building. Green roofs have plenty of positive environmental effects: helping prevent water runoff, preventing heat island effects, regulating temperatures inside the building causing less of a need for heating/cooling measures, the potential for hyper-local food source, benefits to pollinators, aesthetic benefits, etc. After much consideration, however, it was determined that the extra weight the plants and necessary soil would add to the roof would necessitate so much additional support, and therefore more building supplies, that the green roof would actually be worse for the environment than a plain roof.

Didi Pace

In researching this paper a bit further, it seems as though Coase's words may have been distorted by readers in a manner similar to that of Adam Smith's "invisible hand". Many optimistically, and somewhat ignorantly, tend to remember that the 'magic' market will fix itself through bargaining with zero transaction costs. After citing (some of) Coase, people can argue that negotiation will lead to the most efficient allocation of resources, ultimately defending a decrease in regulation and a 'hands-off' government approach. Using this (flawed) logic, the issues of contemporary society (i.e. pollution) will be corrected by the free market. This interpretation game is dangerous and leads to confusion.

Obviously, as Coase later points out, it is not realistic to have entities come together, with perfect information, and reach a consensus at zero cost. In the case of climate change policy, we have already seen how unrealistic these expectations are. It is momentous enough to have all major global parties attend a conference, nonetheless actually agree on something. Further, while there is a consensus that climate change is and will continue to negatively impact the world, we do not yet know the extent of the damage. Since climate change is a global and complicated dispute, the government 'super firm' regulating and/or taxing seems to be the ideal option.

Navid Haider

Although I agree with Coase's arguments on how defined ownership of property optimizes production, I am concerned with distributional equity especially in the context of developing countries. In the real world, the bargaining power of both parties are less likely to be equal. In case of most modern environmental problems, an organized corporation is more likely to be involved. Big, organized conglomerates have the power to influence decisions and would be more likely to exploit parties with less political and social capital. I do think government intervention is necessary in most modern environmental problems because the balance is tipped towards entities with more money. For example, in my hometown there was a problem regarding shrimp cultivation where the farm would negatively impact the nearby farmers. Shrimp cultivation generally involves putting saline water and therefore the nearby soil would face problems of salinity intrusion. Soil would be acidic and crops would not grow. But the shrimp exporters did not even want to negotiate with the farmers and just hired better lawyers to fight the case. The farmers eventually had to move and the shrimp business grew fast in the region. But even government intervention in this case would be biased simply because shrimp counts for 7% of the total GDP of my country. And when we count in the possibility of corruption and time-consuming judicial procedures, negotiation seems impossible in the such economies.

Dani Murray

I am sorry I am late to the party, but I am very excited to be joining this class. This is my first class which explores the effects businesses have on the environment. I have never considered the possible harmful effects that businesses may/do have on the environment. While reading the article, I was particularly drawn to the cattle example. I did not realize how many variables could be at play for a farmer when decided to build a fence or buy extra steer. I thought it was interesting that the farmer will only pay for a fence to be built if it monetarily makes sense in the market and if his herd is large/costly enough. Secondly, it’s interesting that the farmers who’s crops are being eaten/destroyed won’t build the fence nor will he plant more because whatever is being destroyed he is compensated for according to market price that year. Is the system fair? I then found myself thinking about large coal burning power plants located in poor neighborhoods. Is the demand for the product produced by that coal burning power plant high enough that the company would be willing to pay the tax/cost of damage? Do these large plant owners feel as though they are facing a great moral dilemma? Overall, I thought the article brought to light the issue of social cost. It most definitely opened my eyes on the subject. I am interested to see how developments in technology have changed the problem of social cost for the better or worse.

KT Hensler

When Coase discussed nuisance laws and how they were used in court when a harm such as sound or smell was involved, I thought back to my Environmental Policy and Law course about how those hearings so often result in no compensation for those affected by the nuisance. It is almost as if, the cost for a person who is uncomfortable with a sound or smell is higher than that particular nuisance. The actions and time taken to have a hearing regarding airplanes flying over a neighborhood are much more costly and ineffective. Although there are more manageable nuisances, I believe that the legal process is incredibly costly. Another point that stood out to me was when Coase stated that compensating people whose woods were burnt by train sparks was “not necessarily desirable” (29). This is a very specific situation, but I am confused as to what he meant buy such vague language. No tax or cost in general is desirable. He also used the example that a farm owner would be more likely to receive compensation for burnt land than simply a person with trees in their yard. It seems so difficult to gain leverage as a person with trees in their yard because of how difficult it is to monetize a few backyard trees. On a final note, I agreed with Coase when he stated that taxes equal to the amount of harm are not given to those harmed as compensation. This seems to me as a large contributor to the compensation problem. Firms can be taxed to balance out the harm in general, but those harmed are still being harmed despite the taxes paid. I would like to know more about the reasoning for choosing to pay a governmental tax over compensation to those harmed.

Giddings Harrison

Giddings Harrison

Professor Casey

Blog 1: Coase Problem

Coase’s paper informed many of the thoughts and debates that I have been having since joining this class. Environmental damage, whether that be wildfires, flooding or natural disasters lead to economic costs. Much of this environmental cost has been due to global warming. Therefore, I question why we as a society have not internalized these costs and changed our behaviors in the market. Much of Coase’s paper deals with two individuals that work to maintain their behavior by one individual internalizing the cost of the damage that he/she has caused that impacts the other individual. While his first example of the cattle-rancher and the crop-farmer is relatively simple, he expands to show that there are situations in which each individual is responsible for harming the other. This nuanced scenario as well as his addition of transaction costs to his model led me to understand his argument further. Coase definitely expanded on my understanding of government intervention, but I still was left with questions about the government's role in today's policies surrounding climate change.

Thinking about today’s world in which both companies and consumers are aware of the cost of fossil fuels to the environment, I wonder how it is possible that we have not cut back our emissions more. If Coase’s theory holds merit, shouldn’t we have achieved a more optimal level of resource allocation at this point in time given the massive cost of climate change? While I can see change in the private sector, there has by no means been enough of it. If Coase's argument holds, shouldn't the market be increasing the cost of fossil fuel production? This reading left me with more questions than answers on how society should be tackling the issue of climate change.

Walker Morris

Despite being written in 1960, Coase's article is still relevant to social costs associated with many markets today. At the center of his argument, Coase stresses that any action taken against market failures affecting the environment (i.e.: Negative externalities such as air pollution, health effects, and deforestation) should be made with full consideration to all facets of the society effected. While it makes sense in theory, this is very difficult to achieve in reality, especially with full cooperation from all parties. Still, Coase's point that all stakeholders must be considered is valid to almost economic situation, especially that of the negative externalities associated with pollution and climate change. However, in the realm of pollution and climate change it is almost impossible to appease every stakeholder. For this reason, I am a bit critical of some of Coase's examples. The examples using the rancher and adjacent farmer deserve particular attention as they are overly simplistic with very idealistic assumptions. Coase generally assumes that the two parties would be very cooperative and understanding of each other. In the case of polluters cooperating with government regulation and the interest of society, we know that mutual cooperation is almost impossible to achieve. On a first hand basis, I found this to be true when I visited West Virginia two summers ago on my pre-orientation service trip. This trip included a visit to a mountain-top removal site, discussion with a local environmentalist, and a meeting with lobbyists from the Friends of Coal advocacy group. After reading Coase's article and reflecting on my experience in West Virginia, I came to the conclusion that it would be almost impossible for coal mining companies to pay reparations to every stakeholder they have effected without going bankrupt. Companies that produce coal would have to pay substantial fees to the government for years of air pollution, on top of paying for other externalities such as increases in "black lung", birth defects, flooding, water pollution, and the destruction of the surrounding ecosystems. For this reason, addressing the negative externalities associated with coal mining should come in the form of stricter environmental laws, emissions restrictions, and requiring mining companies to leave mining sites better intact. In all, I believe that Coase has many valid points, and that in theory his argument regarding consideration to all stakeholders is valid. Unfortunately, pollution is such a large issue, with stakeholders on a global scale that simply compensating effected stakeholders is almost impossible. Tackling pollution should be done in a manner that reduces pollution, rather than compensating the parties effected.

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