Lecture 12 The Coase Theorem

1
Lecture 12The Coase Theorem

• AEDE/NR 531
• Spring Quarter, 2006

2
Property Rights

• Case Study Oregon Land Use Law
• Oregon has one of the strictest anti-sprawl land
  use policies in the U.S.
• This in essence gives more property rights over
  land use to the government than in other states.
  
• It has been found that many U.S. citizens have
  contradictory goals where they are in favor of
  preserving open space and farmland, but also are
  against any restrictions on use of private
  property.
• Oregon Measure 37
• States that the government must compensate land
  owners if land-use restrictions decrease the
  value of their property, or if they cant pay,
  allow the land-use change to occur.
• 61 of voters voted for Measure 37.
• Presents a shift of property rights from the
  government to land owners.

3
Oregon Measure 37

• Arguments for 37
• Government depends on private citizens to
  generate wealth to provide tax revenue. The
  existence of private property and financial
  security in investments is a critical aspect of
  this wealth creation process.
• Arguments against 37
• 37 will result in a complete obliteration of
  Oregons land use policy.
• The costs of unrestricted land-use development
  will now become a problem in Oregon.
• Much of the lands value is derived from the
  natural scenery. If land owners start selling to
  housing developers the attribute that gave the
  land its value will be reduced.

4
Oregon Measure 37

• What is being debated?
• Who ultimately has land-use property rights?
• Who owns the natural amenities of Oregon?
• Who owns these amenities that provide a benefit
  to everyone but are owned by noone?

5
Public Goods

• What is a private good?
• Excludable
• Rivaled in Competition
• Private goods can be owned.
• The benefits and costs are restricted to the
  owner.

6
Public Goods

• Public Goods are
• Non-Excludable
• Non-Rival
• Public goods do not have natural ownership.
• The benefits and costs of a public good can
  accrue to many people beyond the owner.

7
Supplying Public Goods

• Private owners generally will not supply public
  goods.
• Why? Free Riding
• Private producers have no incentive to supply the
  public good because they cant collect payment.
• Examples

8
The Coase Theorem

• States In the absence of transaction costs, all
  government allocations of property rights are
  equally efficient, because interested parties
  will bargain privately to correct any
  externality.
• Two important results of the Coase Theorem
• In Coases Nobel lecture he emphasized that
  transaction costs are typically very important
  and depend on the initial assignment of property
  rights.

9
Property Rights Example
10
Property Rights Example

• There is a single polluter that benefits from the
  production of goods that as a by-product produce
  pollution. There is a single victim of this
  pollution.
• Questions
• If there are no property rights assigned to
  pollution, how many units will the polluter
  produce?
• Now, assign property rights to the polluter but
  allow the victim to pay the polluter to not
  produce a certain number of units.
• If the victim offers the polluter 47 per
  thousand pounds if you reduce your pollution by 5
  thousand pounds, will the producer accept?

11
More on Oregon Measure 37

• "Oregon voters approved measures Tuesday that
  will shake the foundations of the state's
  30-year-old land-use planning laws...In a state
  better known for its planning than for its sports
  teams, approval of a sweeping property rights
  measure signals a major shift in attitude. 
  Politicians can no longer rely on regulations to
  mold the type of communities they want -- not
  without public buy-in or the money to pay off
  nonbelievers." (The Oregonian, Portland)

12
More on Oregon Measure 37

• "Oregon voters approved measures Tuesday that
  will shake the foundations of the state's
  30-year-old land-use planning laws...In a state
  better known for its planning than for its sports
  teams, approval of a sweeping property rights
  measure signals a major shift in attitude. 
  Politicians can no longer rely on regulations to
  mold the type of communities they want -- not
  without public buy-in or the money to pay off
  nonbelievers." (The Oregonian, Portland)

13
More on Measure 37

• A couple of weeks ago, a circuit court in Oregon
  ruled that Measure 37 is unconstitutional. 
• The plaintiffs had argued that Measure 37 was
  unconstitutional because the measure (1)
  curtails the state's ability to protect the
  health and welfare of Oregonians, (2) grants
  privileges to a select class of landowners and
  (3) violates separation of powers by giving the
  legislature the authority to enforce the law, a
  power that is restricted to the executive branch
  of government.
• In other words, Measure 37 is unfair--not
  inefficient.  So, the argument goes
  on--efficiency or equity?  Is this what Coase had
  in mind when he mentioned transactions costs?