Saturday morning I heard a somewhat intense debate on the radio about whether a mother should breast-feed in public. The debate was sparked by an incident in a restaurant where a breast-feeding mother was asked to 'use a blanket'. Views were completely polarized. Some, like me, thought it outrageous to criticize someone for breast-feeding in public. Others, thought it outrageous to breast-feed in public! This polarization of views is a perfect illustration of the reciprocal nature of externalities, first pointed out by Ronald Coase.
The 'textbook' picture of an externality is typically one of good and evil, like a factory polluting the water that local people drink. The clear suggestion is that the evil doer, the factory in this case, should take account of the effect they have on others. Often, however, externalities do not lend themselves to a simple good and evil. That's the case in the breast-feeding example: Some would place the breast-feeding mother in the role of evil and others would place the person complaining about breast-feeding in the role of evil.
Given that the breast-feeding example has no clear distinction between good and evil the reciprocal nature of externalities is simpler to appreciate. In particular, a woman's breast-feeding in public creates a negative externality for those who do not want to watch someone breast-feeding. But, banning breast-feeding in public creates a negative externality for any mother forced to feed her baby in the wash-room. To stop a negative externality inevitably creates a different kind of negative externality. And note that this holds even if we have a clear distinction between good or evil. To ban water pollution, for example, imposes a negative externality on the factory.
An appreciation of the reciprocal nature of externalities led to Coase's celebrated theorem on how to increase efficiency in the presence of externalities. The theory essentially says that if there are clearly defined property rights (and negotiation costs are negligible) interested parties will negotiate towards an efficient outcome no matter who owns the property rights. For example, if local people have the property right they could charge the factory for its pollution. While, if the factory has the property right it could be paid by local people to reduce pollution. Similarly, if the person who does not like to see breast-feeding has the property right she could charge someone for breast-feeding. While if the person who breast-feeds has the property right she could be paid to breast-feed in the wash-room. These charges or payments correct incentives and 'eliminate' the externality.
Well, that is the theory. In practice, I think the breast-feeding example points to a fundamental floor in the application of the Coase Theorem. We know that people dislike 'unfair' outcomes. And that they would rather 'suffer' than accept an unfair outcome. This suggests that someone may be unwilling to negotiate towards an efficient outcome unless they believe that they are in the position of evil. Consider, for instance, the factory example: The idea that the factory would compensate local people for pollution seems entirely reasonable. The idea that local people would pay the factory to reduce pollution clangs with common sense. And what about the breast-feeding example: If the breast-feeding mother believes it is her basic right to breast-feed in public she is not going to want to pay to breast-feed. And if the person who does not like to see breast-feeding believes it is her basic right to not see breast-feeding she is not going to want to compensate someone for not breast-feeding.
The basic point here is that an assignment of property rights does not change beliefs. British law clearly gives the property right to the breast-feeding mother, but that does not change the beliefs of the person who does not want to see breast-feeding. In a similar way, British law clearly gives the property right to people who do not smoke cigarettes, but that does not change the beliefs of the those who think they have the right to smoke. The Coase Theorem may, therefore, be of somewhat limited applicability. So, while it is important for governments to assign property rights for distributional reasons, as in the breast-feeding case, do not expect to see the most efficient outcome as a consequence.
Given that the breast-feeding example has no clear distinction between good and evil the reciprocal nature of externalities is simpler to appreciate. In particular, a woman's breast-feeding in public creates a negative externality for those who do not want to watch someone breast-feeding. But, banning breast-feeding in public creates a negative externality for any mother forced to feed her baby in the wash-room. To stop a negative externality inevitably creates a different kind of negative externality. And note that this holds even if we have a clear distinction between good or evil. To ban water pollution, for example, imposes a negative externality on the factory.
An appreciation of the reciprocal nature of externalities led to Coase's celebrated theorem on how to increase efficiency in the presence of externalities. The theory essentially says that if there are clearly defined property rights (and negotiation costs are negligible) interested parties will negotiate towards an efficient outcome no matter who owns the property rights. For example, if local people have the property right they could charge the factory for its pollution. While, if the factory has the property right it could be paid by local people to reduce pollution. Similarly, if the person who does not like to see breast-feeding has the property right she could charge someone for breast-feeding. While if the person who breast-feeds has the property right she could be paid to breast-feed in the wash-room. These charges or payments correct incentives and 'eliminate' the externality.
Well, that is the theory. In practice, I think the breast-feeding example points to a fundamental floor in the application of the Coase Theorem. We know that people dislike 'unfair' outcomes. And that they would rather 'suffer' than accept an unfair outcome. This suggests that someone may be unwilling to negotiate towards an efficient outcome unless they believe that they are in the position of evil. Consider, for instance, the factory example: The idea that the factory would compensate local people for pollution seems entirely reasonable. The idea that local people would pay the factory to reduce pollution clangs with common sense. And what about the breast-feeding example: If the breast-feeding mother believes it is her basic right to breast-feed in public she is not going to want to pay to breast-feed. And if the person who does not like to see breast-feeding believes it is her basic right to not see breast-feeding she is not going to want to compensate someone for not breast-feeding.
The basic point here is that an assignment of property rights does not change beliefs. British law clearly gives the property right to the breast-feeding mother, but that does not change the beliefs of the person who does not want to see breast-feeding. In a similar way, British law clearly gives the property right to people who do not smoke cigarettes, but that does not change the beliefs of the those who think they have the right to smoke. The Coase Theorem may, therefore, be of somewhat limited applicability. So, while it is important for governments to assign property rights for distributional reasons, as in the breast-feeding case, do not expect to see the most efficient outcome as a consequence.
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