.. ivide the atmosphere into individual segments of ownership(www.scruz.net). Another limitation is if the resource within the property are mobile. An example of this is ground water. Even if the oceans could be divided up into separate segments for each different fishing company it is impossible to control the fish from swimming about from segment to segment(www.scruz.net).
The next situation is if property rights are irrelevant to the environmental problems. The prime example of this is an explosion in population. Since an increase in population places short term strains on the land and its carrying capacity strengthening property rates would have little effect on these facts(www.scruz.net). The last situation is if the polluter is not the neighbor, but the owner. In other words these situations arise because the profits received from spoiling the land are highly individualized and short-term, but cost of spoiling them are socialized and long-term (www.scruz.net).
According to Deirdre McCloskey the reason why one can find so many faults with the Coase Theorem is that it has been misinterpreted by so many people for so long starting with George Stigler. He explains it in the following manner, The theorem (the misinterpreted version) is supposed to be that is doesnt matter where you place liability for, say, smoke pollution, because in a world of zero transaction costs the right to pollute will end up in the hands of that value it the mostCoases actual point, the core of the Coasean economics, was to note what happens in the many important cases in which transaction costs cannot be neglected. If the situation does not have high transaction costs, then it doesnt matter where the liability for pollution is placed. (McCloskey 2) McCloskey continues by explain that the wrong Coase Theorem is actually an idea of Adam Smiths and others of the British Classical School and not a new idea at all (McCloskey 2). McCloskey is able to distinguish between the two different definitions because of the way transaction costs are defined in the two separate interpretations. Transaction costs are the costs of negotiating and agreement.
If there are a number of parties involved then the costs of coming to an agreement may exceed the benefits. This is not the only transaction cost, there are also cost in searching for information and in evaluated all exchange opportunities. Along with these obvious costs there are monitoring costs policing costs, to ensure that agreements are kept. Joined with monitoring and policing comes prosecution for violators of the agreement. Naturally if the net sum of these cost exceed the benefits received from a transaction then the transaction will never take place.
The Coase Theorem takes into account these transaction cost even though many opponents to Coases Theorem would argue it doesnt. Coase has expressed the fact that a world of zero transactions costs is unrealistic but adds that just because transaction costs exist doesnt mean that private property agreements cannot be reached. Some secondary effects of the Coase Theorem are those on wealth and income. It is natural that the Coase Theorem would effect these factors because both wealth and income are effect by the claims to private property. An unknown author explains that a change in private property assignments change societys overall supply and demand (www.scruz.net 6) This is important because these changes effect the whole economy especially if the parties involved are large firms and the government.
It is also true that most people will charge less to stop an undesirable behavior than it would be to charge for continuing the damaging behavior (www.chass.utronto.ca). This wealth transfer posses a problem because no one can accurately predict the future productivity of the private property in question, be it land or and company. This is easy to see when one considers a large company such as a car manufacturer buying a large plot of land for a new factory. Unfortunately Coase does not sufficiently address this problem in his theorem but just assumed that the changes in wealth and income had no effect on the outcome of the theorem. Along with transaction costs and wealth and income transfers Coases theorem also requires perfect competition to work efficiently. This means that the market features a large number of competitors, homogenous goods, free entry and exit to a market, and perfect information.
This of course leads to lower prices and higher quality goods. The opposite of perfect competition is a monopoly. Using fundamental economics it is easy to see that without perfect competition the incentive to be more efficient diminishes allowing for a greater problem with externalities. Another characteristic of perfect competition is the endless availability of information. Without all the information it makes it hard for a person to correctly maximize their utility through choices.
Principles like opportunity cost play a large role in the determination of action and with out perfect information a persons choice may not be the best. This hinders Coase theorem because it limits the extent to which one may evaluate their private property and negotiations to protect it. Of coarse, perfect competition is not obtainable in a real market but Coase argues, again, that his theorem is still applicable. One economist put it this way, Coase attempts to get around this by claiming that zero transaction costs are a proxy for perfect competition. That is, a monopoly with zero transaction costs will behave like a perfect competitor, since it will seek to maximize its efficiency and profits. Most economistsfind the idea of competitive or efficient monopolies hard to swallow.
But even granting Coase his point, a world of zero transaction costs is only slightly less imaginary than perfect competition. (www.scruz.net 8) After examining all of the faults of the Coase Theorem it may be easy to say that it has no practical use but this is not entirely true. Some of the opinions expressed above are extreme and not all together applicable to Coases theorem. Coase is may times correct when he simple says, paraphrasing of course, but, it works! One very practical use of the Coase theorem is in the creation of environmental regulations. Environmental regulations concerning externalities began in common law as it pertained to those things classified as nuisances (Clarkson 825). A recent example of an environmental nuisance case was in 1996. The case Maddocks v Giles set the precedent for payment as compensation for a nuisance.
In the case Maddocks owned property next to a gravel pit that contained a small spring. The gravel company, owned by Giles , began a new excavation and in doing so stopped the spring from flowing. This had no significant environment impact on the land and animals but was a nuisance to Maddocks. The supreme court ruled that Maddocks had a legitimate right to his property and ordered the case to trial for compensation (Clarkson 825-26). This example shows that the US court system up holds the right to compensate one for an externality effecting their property.
One of the more Coasean statues are those that apply to air pollution. In cases in which one factory is polluting the air in a certain community it is necessary for regulations to create incentives for that factory to cut back the amount of externality it is producing. It can either pay another company for their rights to pollute and influence that company to produce less pollution or pay in liability the effects the pollution may have on the inhabitants of the polluted community. The government, through the Clean Air Act, strongly suggests that a polluting factory cut back the pollution in their own plant or pay another plant to cut back their pollution (Clarkson 828). This is a clear example of the Coase Theorem and the effects of externalities on property rights. Alison Butler put it the following way, The Coase Theorem proves that the equilibrium level of pollution is the sameFurthermore, such an outcome is efficient.
Thus, when property rights are clearly defined and there is an explicitly designated polluter and victim, the efficient outcome is independent of how the property rights are assigned. (Butler 3) All though Butler recognizes the ability of the Coase Theorem to settle pollution disputes she does point out one flaw. The Coase Theorem becomes less efficient when there are multiple polluters and many parties effected. In this case the pollution outcome may depend on the assignment of property rights unlike the statement made above (Butler 3). Truth is that Coases theorem does work even with transactions costs and without perfect competition if applied in the way that he intended.
Most opposition to the Coase Theorem come form the misunderstanding of his theorem as discussed earlier. Moreover the practical use of the Coase Theorem does exist and is applied daily to situations where externalities effect anothers property rights.