Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

we know which party has the right to do what. (As we’ll explore later in the chapter, property rights often involve things far more complicated than just property.) Does Stuart have the right to make whatever noise he wants? Or do I have the right to work in relative quiet? Presumably the statutes for the city of Chicago answer that question. (The answer may depend on time of day, giving him the right to make noise up until some specified hour and giving me the right to silence during the nighttime hours.)

If I have the right to work in peace, then any payment would have to go the opposite direction. Stuart would have to pay me to start banging away. But he wouldn’t do that in this case, because it’s not worth it to him. As a temperamental writer, the silence is worth $100 to me, so Stuart would have to pay me at least that much to endure the noise. Playing the bongos is only worth $50 to him. He’s not going to write a check for $100 to do something that provides only $50 of utility. So I get my silence for free.

This explains Coase’s second important insight: The private parties will always come to the same efficient solution (the one that makes the best use of the resources involved) regardless of which party starts out with the property right. The only difference is who ends up paying whom. In this case, the disputed resource is our common wall and the sound waves that move back and forth across it. The most efficient use of that resource is to keep it quiet, since I value my peaceful writing more than Stuart values his bongo playing. If Stuart has the right to make noise, I’ll pay him to stop—and I get to write in peace. If I have the right to silence, Stuart won’t be willing to pay enough for me to accede to his bongos—and I get to write in peace.

Remarkably, this kind of thing actually happens in real life. My favorite example is the Ohio power company that neighbors claimed was emitting “a bizarre blue plume” that was causing damage to property and health. The Clean Air Act gave the town’s 221 residents the right to sue the utility to stop the pollution. So the American Electric Power company had a decision to make: (1) Stop polluting; or (2) pay the entire town to move somewhere else.5

The New York Times reported on the answer: “Utility Buys Town It Choked, Lock, Stock and Blue Plume.” The company paid the residents roughly three times what their houses were worth in exchange for a signed agreement never to sue for pollution-related damages. For $20 million, the utility’s problems packed up and went away—literally. Presumably this made financial sense. The New York Times reported that this settlement was believed to be the first deal by a company to dissolve an entire town. “It will help the company avoid the considerable expense and public-relations mess of individual lawsuits, legal and environmental experts said.”

Coase made one final point: The transactions costs related to striking this kind of deal—everything from the time it takes to find everyone involved to the legal costs of making an agreement—must be reasonably low for the private parties to work out an externality on their own. Stuart and I can haggle over the fence in the backyard. The American Electric Power company can manage to strike a deal with 221 homeowners. But private parties are not going to work out a challenge like CO2 emissions on their own. Every time I get into my car and turn on the engine, I make all of the six billion inhabitants of the planet slightly worse off. It takes a long time to write checks to six billion people, particularly when you are already late for work. (And it’s arguable that some people in cold climates will benefit from climate change, so maybe they should pay me.) The property rights related to greenhouse gases are still ambiguous, too. Do I have the right to emit unlimited CO2? Or does someone living in a Pacific island nation have the right to stop me from doing something that might submerge their entire country? This is one conflict that governments have to tackle.

But let’s back up for a moment. Government does not just fix the rough edges of capitalism; it makes markets possible in the first place. You will get a lot of approving nods at a cocktail party by asserting that if government would simply get out of the way, then markets would deliver prosperity around the globe. Indeed, entire political campaigns are built around this issue. Anyone who has ever waited in line at the Department of Motor Vehicles, applied for a building permit, or tried to pay the nanny tax would agree. There is just one problem with that cocktail party sentiment: It’s wrong. Good government makes a market economy possible. Period. And bad government, or no government, dashes capitalism against the rocks, which is one reason that billions of people live in dire poverty around the globe.

To begin with, government sets the rules. Countries without functioning governments are not oases of free market prosperity. They are places in which it is expensive and difficult to conduct even the simplest business. Nigeria has one of the world’s largest reserves of oil and natural gas, yet firms trying to do business there face a problem known locally as BYOI—bring your own infrastructure.6 Angola is rich with oil and diamonds, but the wealth has financed more than a decade of civil war, not economic prosperity. In 1999, Angola’s rulers spent $900 million in oil revenues to purchase weapons. Never mind that one child in three dies before the age of five and life expectancy is a shocking forty-two years.7 These are not countries in which the market economy has failed; they are countries in which the government has failed to develop and sustain the