Peter G. Stillman wrote:
>----------------- HES POSTING -----------------
>Given the brilliance of the discussion of 
>Sidgwick and Coase, I am hesitant to ask a 
>question that probably should have been answered 
>for me in Econ 10, back in 1962-63, except James 
>Tobin was priming the pump and I went on to become a political theorist.
>
>I have a question about Coase, that has been 
>intensified by the discussion -- especially the 
>noise around the airport example.  My impression 
>is that Coase, whom I have not read for about 
>two decades, is absolutely brilliant in terms of 
>giving a free market, individualistic, static 
>explanation of how, in any circumstances where 
>the costs of negotiation are low (zero?), the 
>two parties will come up with the optimal 
>solution for each of the parties.  That is fine, 
>but has always struck me as very 
>individualistic, with no attention to what I 
>would think of as social interests.  Cannot, for 
>instance, there be a social decision (a 
>governmental dictate) that airplanes should be 
>forced to try to reduce their noise, and 
>therefore the government should introduce a bias 
>into the negotiations, or a regulation that 
>insists that noise be reduced (rather than 
>individuals be moved -- and traditional 
>communities be upset).  The society / the 
>government might think, for instance, that 
>restrictions on noise might lead to 
>technological innovation about noise control 
>that would produce benefits throughout the 
>society, or that penalizing noise (rather than 
>everyone on Long Island who lives under the JFK 
>air lanes) is a socially more acceptable 
>result.  Or, to go to the example I remember 
>from Coase, why not make the railroads reduce 
>their sparks -- perhaps also by giving them a 
>corridor that farmers need to stay out of.


the issue you bring is the issue of the 
externalities: costs of a transaction not borne 
by the parties to the transaction. Noise 
pollution is a cost of airline travel, but not 
borne by the producer or consumer, in absence of 
regulations which force the costs back into the 
price. Every transaction includes externalities, 
since every transaction occurs in, and assumes, a 
certain social setting whose costs are not 
reducible to individual transactions (that is, 
methodological individualism fails). Price theory 
usually doesn't account for the externalities, 
and hence can never be a complete description of 
any transaction. The minimum that any science 
ought to accomplish is a complete description of 
the phenomena within its domain, and modern 
economics frequently fails to do this (or even 
attempt it) and hence fails to be a real science.

The externalities relate to both economic 
efficiency and social justice. Social justice is 
usually a matter of proper cost accounting, that 
is, of allocating costs back to those who cause 
the costs, whether through an economic process 
(pricing) or a political one (regulation and the 
like.) An economy with a high degree of 
externalities cannot be considered efficient. For 
example, if someone comes with a process to cut 
the cost of widgets in half, an economist might 
regard that process as "efficient." But if, in 
this new process, the factory dumps a 1,000 
gallons of mercury oxide in the river, causing 
birth defects and miscarriages downstream, then 
the process is not, in fact, "efficient," unless 
one considers mayhem efficient. Some will argue 
for a symmetry between so-called "positive" 
externalities and negative ones. They will say, 
for example, that the negative effects are 
"balanced" by the fact that the new widget 
factory provided jobs. However, this is simply 
wrong, since the externalities, "positive" and 
negative, are usually asymmetric; giving the 
father a job does not "balance -out" poisoning his son.


John C. M?daille