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