[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

matters? Some economists, led by the Nobel laureate Ronald Coase of the University
of Chicago Law School, argue that government should simply rearrange property
rights. Coase’s theorem says that with appropriately designed property rights,
markets could take care of externalities without direct government intervention.
Consider, for example, the case of a small lake in which anyone can fish without
charge. Each fisherman ignores the fact that the more fish he takes out of the lake,
the fewer there are for others to take out. No fisherman has an incentive to worry
about whether there will be fish in the lake in the future, either. Why should he?
After all, if he leaves fish in the lake today, someone else might take them out tomorrow.
If all fishermen think this way, the lake will quickly be overfished, likely to the
point of wiping out the fish stock. If the government were to rearrange property
rights and grant the right to fish to a single individual, then she would have every
incentive to fish efficiently. There would no longer be any externality. She would
have an incentive to take into account both the long-term and the short-term effects
of her decisions. She would realize that if she fished too much today, the lake would
contain fewer fish tomorrow. If it were a large lake, she might let others do the fishing
and charge them for each fish caught or regulate the amount of fish they could
catch. But the prices she charged and the regulations she imposed would be designed
to ensure that the lake was not overfished.
The point of this example is that the problem of overfishing is solved with
only limited government intervention. All the government has to do is assign the
property rights correctly.
Coase envisioned that once property rights were assigned, market solutions or
bargaining among potential users would ensure efficient outcomes. Consider the
conflict between smokers and nonsmokers over whether to allow smoking in a room.
Smokers confer a negative externality on nonsmokers. Coase suggests a simple solution.
Give the rights to the air to one individual, say, a smoker. He has the right to
decide whether to allow smoking or not. For the sake of simplicity, assume that there
are only two individuals in the room, one a smoker and the other a nonsmoker. If
the value of fresh air to the nonsmoker exceeds the value of smoking to the smoker,
the nonsmoker would offer the smoker enough money to compensate him not to
smoke. Conversely, if the property rights were given to the nonsmoker, and if the
value of smoking to the smoker exceeded the value of fresh air to the nonsmoker,
then the smoker could compensate the nonsmoker.
Coase argued not only that assigning property rights ensures an efficient outcome
but also that how the property rights are assigned affects only the distribution of
income, not economic efficiency. Whether smoking would be allowed would depend
merely on whether the value of smoking to smokers exceeded or was less than the
value of fresh air to nonsmokers.
The appeal of Coase’s theorem is that it assigns a minimal role to government.
Government simply makes the property rights clear, and leaves the efficient outcome
to private markets. Opportunities to apply the theorem are limited, however,
because the costs of reaching an agreement may be high, particularly when large
numbers of individuals are involved. Imagine the difficulties of assigning property
rights to the atmosphere, and arranging that all the individuals adversely affected
by air pollution negotiate with all those contributing to it!
POLICY RESPONSES TO PROBLEMS IN THE ENVIRONMENT ∂ 409