ECON 255: Pigou vs. Coase for next Thursday
http://jollygreengeneral.typepad.com/files/chapter-3-p.-45---91.pdf
I want you to focus on the Pigou vs. Coase debate in the chapter.
In case you are interested in the originals.......
https://econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/coase.pdf
https://books.google.com/books?hl=en&lr=&id=26kAAwAAQBAJ&oi=fnd&pg=PT10&dq=pigou+1938+welfare+economics&ots=z8o6kHWInb&sig=lWhrZc_eRcxPGpGYdwqLcOBy7Og#v=onepage&q=pigou%201938%20welfare%20economics&f=false
I want you to focus on the Pigou vs. Coase debate in the chapter.
In case you are interested in the originals.......
https://econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/coase.pdf
https://books.google.com/books?hl=en&lr=&id=26kAAwAAQBAJ&oi=fnd&pg=PT10&dq=pigou+1938+welfare+economics&ots=z8o6kHWInb&sig=lWhrZc_eRcxPGpGYdwqLcOBy7Og#v=onepage&q=pigou%201938%20welfare%20economics&f=false
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ReplyDeleteWhen looking at public goods, finding the MSB and MSC seems to be very abstract and difficult. The MPB and MPC are relatively simple since firms and individuals recognize monetary costs and revenues. What are some of the current methods that are used to measure the projected societal impact of a marginal unit of pollution? Since these future benefits are more abstract, finding the PV seems to be a loose approximation. Are there other methods besides PV that are used to evaluate public goods? In short, how is the optimal tax calculated in order to achieve the societal equilibrium.
Before even reading the textbook author's argument about why Coase's Theorem is incorrect I already agreed with Pigou. People as a general rule are self interested, and when it comes to a public good like clean air, if property rights aren't defined there's no incentive for a firm or individual to preserve air quality for those around them. I'm generally more on the side of less government intervention is better, but in the case of environmental concerns like carbon emissions, I feel it's absolutely necessary for the government to step in to fix the imbalance of incentives. This maybe isn't as much of an issue when it's a well defined disagreement between two neighbors, but when it's preserving the arctic for polar bears versus big oil companies, the bears can't exactly lobby congress. I find it interesting that for a guy who's theorem has been essentially shown to be wrong, I've heard the name Coase a lot more than the name Pigou. Coase's name has come up in both my math and econ classes at W&L, so I assume he must be famous for more than this one theorem.
ReplyDeleteI agree with Sloan in terms of her perspective on Pigou vs. Coase. Coase's theorem works in a bilateral negotiation but as soon as you introduce more variables, the theorem, as the chapter notes, breaks down. With broad environmental issues, it is hard to imagine an effective and efficient negotiation for mutual benefit. In the case of Pigou, while I agree with his theory, I think in the case of environmental reform, incentives work better than deterrents. If you were to incentivize less pollution on the firm side, or incentivize household recycling programs I think you will gleam better results than if you were to take a more aggressive disincentive approach. While there are obviously counter-examples where a stick works better than a carrot, I believe, by-and-large, that incentives would work well to encourage more environmentally friendly behavior.
DeleteI agree with pretty much all of what Peter and Sloan said, but I'm curious why Peter thinks incentives work better than deterrents. I don't necessarily disagree, but I'm not exactly certain what the theory is. This might not be the right way to look at it, but I feel like in order to incentivize firms enough to not pollute as much, the government will have to heavily subsidize those firms to the point where they are no worse off than when they could pollute. On the other side, taxing these firms will cause them to stop polluting, but will also create some revenue for the government, which they could hopefully (although it isn't usually efficient) invest back into public goods to increase the marginal social benefit.
DeleteIt is clear here that the author believes that there needs to be a transition towards economic incentives and away from direct controls in the fight against pollutants. I mostly agree with this, but I don't think economic incentives would be able to effectively curb this problem by themselves. Although it may be very costly, a combination of economic incentives and direct production of environmental quality would both deter future pollution and fix the damage that can be fixed. The direct production of environmental quality may also affect the overall opinion of society on pollution and the environment by showing the people that it is an issue that their government cares about, so therefore they will likely be more inclined to care about it too. The MSC of direct production of environmental quality is very high, and the MSB is certainly lower than the MSB of preventing the pollution in the first place, but it's hard to put a value on the effect that a change in public opinion may have going into the future.
DeleteI left this as a reply to Sloan on accident, and I'm not sure how to remove it. It was meant to be an independent comment. Sorry about that!
DeleteI'm framing this as a response to the discussion by Sloan, Peter, and Kevin. Between Pigou and Coase, I'm more inclined to agree with Pigou since, unlike Coase's, his theorem on the control of negative externalities doesn't break down with ease. Kevin and Peter discuss above the use of either incentives or deterrents to control pollution, but it seems that a better way of controlling pollution is to use both the carrot and the stick to monitor total emissions. At the risk of sounding like an economist, I'm inclined to think that creating a market for emissions (E.g. carbon) is the best way of controlling total emissions at polluting firms. In a carbon credit market, firms are given a baseline amount of credits depending on their size which allows them to pollute as much as their credits mandate. If certain firms pollute less than their allocation, they may sell their credits, and firms which pollute more than their own credits mandate may buy up their competitor's credits to allow for the extra pollution. If the goal is to taper pollution over time, then a command-and-control style solution could be applied in cooperation with the total carbon credit market. Such markets have been created and been very successful in incentivizing and deterring pollution. A public firm's number one financial responsibility is to maximize returns for their own shareholders; it follows that creating a market which monetarily incentivizes lower emissions should be an effective way of cutting pollution without the use of heavy government subsidization.
DeleteThe part of Pigou's argument that I agreed with most is the idea that a tax should not be placed on the output, but the externality itself, because the output should not necessarily be discouraged. In this chapter the author used steel as an example--while certain aspects of steel production may produce harmful externalities, the actual output (steel) is an extremely important product that benefits much of society. If there were to simply be a tax on steel, companies would be disincentivized to produce steel, which would definitely result in large private and social costs (weaker buildings, etc.). By only taxing the externality itself, we send a message that we are in favor of steel production as a whole, and only have an issue with certain parts of the manufacturing process. Ideally, this would drive steel companies to develop cleaner methods of steel production that would not decrease (and hopefully, increase) yield.
ReplyDeleteTo me, the Coase theorem highlights the danger in always relying on economic theory and not questioning the assumptions that they posit. Coase's theorem breaks down when applied to a negotiation involving more than two parties. Given the global nature of markets today, it is almost impossible to imagine a situation such as that of the cattle rancher and the crop farmer occurring. The chapter mentions the applicability of the Coase theorem in the 1960s and 1970s, and I would argue that it has now essentially become futile. Coase assumes that the costs accrued by the negotiation between the victim and the generator of the externality are insignificant, which seems ludicrous to me. Negotiations between millions of firms and individuals involve agents and representatives, travel, technology, etc., all which bear costs. Moreover, Coase makes it seem like these negotiations are settled very quickly, ignoring the fact that negotiations between multiple parties may be extremely drawn out, thus delaying the "automatic" correction of the environmental externality.
ReplyDeleteI agree with Laura that the Coase theorem breaks down when applied to today's modern (and very global) economy. Environmental issues have become reason for countries to come together and take action, but international contention has defined many of the meetings that have taken place. The large number of players makes 100% unanimity nearly impossible, and even government officials who look out for the interests of their people are too self-interested to compromise. The more people involved, the more opinions, and the more unlikely it is for negotiations to happen efficiently. It seems like Pigou understands that governments need to intervene for anything to actually have the potential to change.
DeleteI tend to agree with Pigou’s argument over Coase’s that there is need for governmental intervention in order to close the gap between marginal private costs and marginal social costs. I am more skeptical to the extent to which that is a realistic expectation in our world today. The free-rider problem makes it difficult to create concerted and supportive efforts around our shared resources. The author brings up the example of the Sierra Club, and how everyone benefits from its impact on shared resources, while only a select few are contributing. This problem applies to both the Coasian and Pigou frameworks. The other issue with Pigou’s argument is the ability to quantify the effects of pollution on society in monetary terms. How do governments, which have to be willing to do so in the first place, approach and tax big industry without an accurate price tag estimate of the companies’ costs to society? While carbon taxes appear to be a solution for curbing emissions, I do not know if the tax fully encapsulates the marginal social costs to society.
ReplyDeleteEfficiency being a primary concern of ours, we should consider the benefits of government regulation to help achieve the highest level of efficiency and optimality in the case of externalities. I believe that the gov’t can help achieve these levels by increasing firms' private costs to reflect actual social costs. The article goes into detail into Coase's theorem and its “four flaws.” They cite issues with transaction costs and varying definitions of property rights. Although I see the main problem with Coase's theorem is that it is too absolute. He doesn't leave room to even consider any gov’t policy hat could in some cases discourage environmentally harmful activities. This ideological rejection of gov’t intervention prohibits any research into its benefits. On the other hand, Pigou's argument that all environmental issues can't be solved by contractual negotiate seems sensible. Nature, climate and ecosystems are complex and often unpredictable and it seems unlikely one solution could work in every case. Coase should acknowledge there exists circumstances for financial incentives, pollution taxes and government coercion, especially since there is data that suggest success from these policies.
ReplyDeleteDespite the sound theoretical logic of Coase's theorem, it clearly breaks down under the the complications of the modern economy. The international trade and the sheer number of actors in the economy make the proper assignment of property rights and the creation of a market with low transaction costs essentially impossible in practice. Additionally, information asymmetry issues arise in markets for externalities such as air pollution. Often companies producing pollution have more knowledge of how much pollutants they are producing and how harmful those pollutants are than citizens engaged in these markets. While I subscribe more fervently to Pigou's taxation model, this is not to say that this approach lacks significant challenges. As some of my classmates have mentioned above, imposing a monetary value on the social costs produced by private firms is a very difficult undertaking. However, it is my opinion that it policymakers have a better chance at levying a tax that approaches an efficient value than a Coaseian market generating organically around environmental externalities.
ReplyDeleteMy initial takeaway from this reading was the asymmetric arguments provided for Pigou and Coase. There was a substantial section dedicated to disproving Coase while only a small portion dedicated to Pigou. I found it interesting that so much effort went into disproving Coase, when in all honesty just reading his initial theorem I knew it was incorrect. Coase seems incapable of viewing the market for what it truly is, which as we have discussed in class is far from perfect. Based solely on our previous readings in which economists emphasize their support for government intervention in market failures caused by environmental externalities, I find it hard to believe that people site Coase’s theorem at all. The fact that Coase uses the example of a farmer and cattle rancher to back his theorem speaks to it not encompassing the market as a whole, rather a few individual transactions. It is clear to me, a non-economics major, that the market as it is currently does not naturally encompass negative environmental externalities, and steps must be taken by the government such that MPC=MSC.
ReplyDeleteCoase believes the market will work itself out and the externality will eventually be equal to the MSC. As the externality becomes more complex, Coase’s theorem seems less feasible. Pigou’s argument stands better, because it relays the fact that people are driven by their own interests, and negotiations like Coase explains will not always happen just due to human nature. Coase’s theorem relies too much on assumption and not practicality which is dangerous. To think that people will always make fair negotiations with each other is impractical. Pigou’s idea to tax the externality and correct the market that way will effectively will merge the gap between private/social costs and private/social benefits.
ReplyDeleteClearly the Coase theorem, if it were ever actually efficient, is unequipped to deal with the environmental problems we currently face. I agree with Laura that the transactions costs associated with environmental externalities today are staggering, and I would be surprised if they were ever entirely negligible. Even in the 60's there were far more sophisticated exchanges taking place than that of just a rancher and a farmer. It makes much more sense to have governmental intervention when an externality is imposing a sufficiently large cost. I think I would have a hard time finding anyone who would disagree with the notion that those who knowingly impose costs on the rest of us should have to pay a premium. Obviously, that is easier said than done. As is pointed out in the chapter, cost-benefit analysis has to be done on a case by case basis. That said, we should never be deterred from doing so.
ReplyDeleteThis reading provided me with an entirely different viewpoint from the core econ classes I have taken. During principles of micro, the Coase theorem was taught as a set in stone theorem. Though I recognize that the class revolves around theory and the basics of economics, I'm finding it much more enriching to read the counter-arguments. I think the breakdown of the Coase theorem was both logical and well-articulated, and made a lot of sense. Despite the fact that I agree with this analysis, I think it is still important to look at government intervention as a whole and pinpoint which policies could really work and which have proven themselves faulty (of course, the author provides plenty of in-depth analysis throughout the chapter).
ReplyDeleteA real-life example that I believe could support Pigou and the breakdown of Coase's theory would be the case of Yokkaichi. The pollution in the port city had created an extreme health issue, to the point where the mortality rate was 10 to 20 times higher than in other areas of the region. After decades of white-smog from sulfur dioxide taking over the city, the people sued the government (over 500 people were involved in the case). When the government ruled in their favor, policy after policy was enacted, first in Yokkaichi and then throughout Japan. The court directly ruled that the owners of the polluting companies were in the wrong, and they had to create ways to counteract the problems they started. Air pollution has gradually declined since the 70's and things are improving. The mere fact that there were numerous amounts of both victims and generators and that they were not solving things themselves is support for the author's criticisms. There were obvious transaction costs (taking things to court, fees, etc.) and the transaction itself probably could not have occurred (or had the same result) without the government there to intervene, support, and enforce.
I reacted very similarly to Kitanna in response to the chapter's analysis of Coase's Theorem. The counter-arguments to the theorem are both more interesting and seem to have much more support and substance than the argument itself. I find Coase's Theorem to have too many contingencies to be functional in the world of environmental economics, as there are many complex factors often involved in the realm. Even with all of the conditions satisfied, I do not see much practicality in his example of the rancher and farmer. Nowadays with the presence of industrial farming, factory farming is a world in which farmers/companies look out for themselves. Coase believes that if adding a cow to a rancher's herd will harm his neighbor more than it would benefit himself, that he would not do it. Perhaps, this used to be true. But today, this would not occur in the highly mechanized form of farming that has taken over the US- small farmers will take any additional benefits they can get, as it is already so difficult to compete with industry farming.
DeleteAfter reading Pigou and Coase, I found the former’s reasoning a lot more logical than the latter’s. It is easy to see how Pigou’s suggested solution effectively solves the problem – the story ends as soon as the firms’ MPC is equal to the MSC, and the quantity produced is the optimum. On the contrary, I find the Coase Theorem flawed. Lets tweak Coase’s example to make it more realistic. Lets say the farmer passed away and that he left all his belongings to his grandson who is not alive yet. The property is abandoned and the farmer’s son (future father of the farmer’s grandson) lives in a different country and since he didn’t inherited the property he never visits it or even cares about it. Now, who is going to “negotiate” with the rancher? The answer is no one, because at the present time no one “cares” about the house. As a result, MPC will be lower than MSC and the externality will keep existing.
ReplyDeleteIn first reading the explanation of Coase's theory the fundamental problem with his proposition is is obvious. The example of the sierra club representing parties interested in having clean air is the point that most glaringly exemplifies the shortcomings of having private enterprise negotiate with private businesses to ensure a public good. The free rider problem is obvious, as are problems facing the sierra club in terms of enforcement, oversight and regulation, and the counterargument to all these issues is only small leap of logic beyond. If the government was responsible for the clean air negotiation these problems are resolved. All citizens have a right to vote and participate in electing the government who would deal with the negotiations thus eliminating the free rider issue. Eminent domain handles all issues of enforcement and the government has the capability to orchestrate regulation and oversight. It is clear to me the Pigou is correct. Negotiation between government and enterprise to establish clear tax codes and or regulation is the optimal solution.
ReplyDeleteThe simple case of Coase theorem's makes logical sense, but it is clear that the underlying assumptions are broken when studying environmental issues that effect large masses. One assumption is that the transaction cost between parties is insignificant, which is not true in many cases. From a very brief reading of Coase's initial work, I found that he did address the problem with this assumption by using the simple example of smoke nuisance. In that case, he says that is may be more efficient for the government to regulate a smoke-producing-firm to install preventative devices (because there are too many parties effected by the smoke). I believe that Coase does favor market- based solutions, but also respects nuances and would recognize the need for a case-by-case analysis. His viewpoints do remind us that government solutions are an option, but they come with costs that must weighed against the benefits of the intervention.
ReplyDeleteI went into this reading predisposed to agree with the logic presented by Pigou, and having heard both sides (those of Pigou and Coase) of the intervention debate, I maintain my agreement with the use of environmental taxes over a laissez faire approach to the problem. Coase's theory, while nice and convenient to think about in his cattle rancher versus farmer example, falls apart in the real world where externalities are produced by not one, but millions of generators and are felt by millions of people in the case of air pollution and similar large scale environmental issues. The notion, conceptually represented in the text's diagram, that producers of externalities and victims of externalities will be able to negotiate an efficient price and level of externality is absurd in the real world in which externalities are felt by people all across the country as well as the world. Coase's approach is simply not practical for significant environmental issues. My view is reaffirmed by the results that Baumol and Oates derived which showed that in order for a socially optimal level of the externality to be achieved, there must be some system of asymmetric pricing. This is because the people who are victims of the externality cannot choose the amount of the externality that they feel - they are simply exposed to a certain amount regardless of their willingness to pay to get rid of it. An efficient market uninhibited by government regulation therefore cannot possibly produce the socially optimal level of the externality. Government imposition of "Pigouvian" taxes is probably a much more effective real world solution than letting the markets for externalities work on their own. I feel like this conclusion is backed up by numerous examples of inefficient externality production all over the globe. Is there not an inefficiently high level of carbon dioxide in the atmosphere at the moment? Coase's argument would suggest that the carbon dioxide problem would solve itself through market operations, but does the problem not still exist? Taxes are likely a better way to mitigate this and many other similar environmental issues.
ReplyDeleteIn this chapter, the critical flaws in Coase’s argument are clearly outlined. I agree that the Coase theorem is an overgeneralization, simplifying externalities to address individual cases. The author mentions the recognition of the Coase theorem in the 1960s and 1970s, despite erroneous assumptions. But, it is clear now that there exist externalities that surpass the individual generator/victim format. While Coase’s argument fails to provide valid reasoning against government intervention, how do we know that Pigou’s argument is not also an over generalization? This transitions the argument into how the government should intervene, rather than if they should. Pigou’s model clearly demonstrates that MSC>MPC, and a tax would shift the curve to an optimal equilibrium of quantity. However, similar to Coase’s theorem, how do we know this is not an over generalization? Another case of model to reality, does Pigou’s model of the externality tax also contain overarching assumptions?
ReplyDeleteThe Coarse-Pigou argument was one that from the start, I had no clear opinion on who I sided with because both seemed at first too simple for such an important and complicated issue. In Coarses argument, the biggest problem I had was that from the beginning I had a hard time being sold on the idea that externality taxes are unnecessary from an example about a cattle rancher and a crop farmer. I like how the textbook explained some flaws about Coarses theorem and I think Coarse makes some fair arguments but I think the fact that he assumes so much is an issue. As for Pigou, the model shown seems a little to simplistic, but I could see how if I read more about him and his theory, I could agree with it more than Coarses. Another thing I noticed was they are both over 50 years old so I am curious as to how the two economists would think of the issue in todays world.
ReplyDeleteMany of the above comments point out that in the Coase vs Pigou argument, Pigou seems to come out on top when considering real world implications of negative externalities (namely that so many actors are involved in the market that transaction costs are exceedingly high which leads us to believe that the Coase theorem will break down in real life). I agree with much of what has been said above regarding the strength of the Pigou argument (and the weakness of the Coase theorem). Rather than reiterate those sentiments, I think this discussion can be tied back to our discussions in the last two classes on misconceptions of how economists think about the environment. Kitanna described an experience that I'm sure many of us have had. The Coase theorem is presented as set in stone in ECON 101 and the ways in which it may break down in its actual application are not typically discussed. I think this leads to the perpetuation of many of the myths we encountered in the Fullerton and Stavens paper. If we think of the fourth myth (economists only think of efficiency not distribution) this relates to the Coase theorem in that transactions may occur when settling issues of negative externalities. However, these transactions may favor certain interests that are more powerful than others (such as Sloan's example of the polar bears versus big oil) and can afford those transaction costs. If the Coase theorem is over emphasized without the discussion of its applications it can lead even Econ majors to have a poor understanding of how the model breaks down in the real world.
ReplyDeleteOne of the main insights I gained from this chapter was the ability for different paths of reasoning and arguments to reach divergent conclusions and recommend different courses of action. Certainly, several flaws in Coase’s argument were pointed out that undermine its applicability to real world scenarios, particularly large scale ones. However, these flaws may not be evident to some people and others may have different perspectives. I think this debate between Pigou and Coase exemplifies one of the reasons why policies related to the environment and economics can be so difficult to agree upon. The underlying processes of though vary. Furthermore, this chapter is connected to the 4 myths that people have about the way economists think about the environment in that theorems and models often rely on assumptions that may not always exist in actuality.
ReplyDeleteI found Pigou’s argument to be very interesting. I thought that his explanation behind taxation on the externality as opposed to the output of the good itself due to the fact that the good itself has benefits, it is only the externality associated with the good that has negative social effects.
ReplyDeleteSecondly, I found Coase’s theorem to be fairly insensitive to those of lower economic status. When he talks about how the market will generate an optimal level of the externality, I instantly thought of a town near my home in Connecticut. This town is primarily composed of people of a lower economic status and cannot readily move out of the area. There is a massive coal burning plant near these neighborhoods that outputs an incredibly unhealthy amount of particulate matter leading to respiratory issues with many of the people that inhabit the surrounding neighborhoods. The wealthier towns surrounding the area make this town the only one that the plant can operate in within the county. I was curious to see how this example would fit into Coase’s theorem due to the lack of a balancing power that would reduce the externalities. How would Coase argue his theorem in this case?
In describing both the Coase and Pigou theories of government intervention and environmental externalities, the chapter spends a considerably longer time on the Coase theorem. Not only does the author dedicate more space explaining it's general concepts, but the chapter also dives into fundamental arguments for and against the Coase theorem, pointing out 4 important flaws. No analysis of this nature is addressed regarding Pigou. Is this the result of the Pigou theorem being more widely accepted, and therefor less criticized, or rather is it just an effect of the Coase theorem being more fundamentally complicated?
ReplyDeleteUsing Pigouvian taxes to correct market failures might seem simple in theory but it is much more complicated in reality. The three issues I had with Pigou's theory are the following:
ReplyDelete1. How would we measure social costs of a certain externality in order to be able to determine the tax imposed? Trying to measure social costs of an externality would not only be time consuming and costly but also not feasible in the first place.
2. Imposing taxes in one country or state but not another could lead to the creation of black markets which would end up being counter-productive.
3. Last, if we were to correct all (or most) externalities through the Pigouvian tax, then prices would increase dramatically. This price inflation will end up hurting mostly the lower classes of the society who would also have to take on the additional burden of rising prices. If the ultimate goal of this policy is to maximize the welfare of the society, it is then crucial to take into account all people that will be affected by it.
Coase’s argument falls apart in large part due to its simplistic nature. He fails to recognize many of the important variables that create a more complex situation in the real world (These are the 4 reasons the author gives at the end). Pigou’s argument on the other hand, is clearly a better and more proactive solution. In theory, the government should be able impose taxes when marginal private cost is less marginal social cost, and they should create incentives when the marginal private benefit is less than the marginal social benefit. Ideally, these two policies, when applied in their respective situations, would naturally bring the market to equilibrium; however, they haven’t been entirely successful. Like Coase’s model and like many other economic models, Pigou’s is also a simplified version that ignores many significant variables that are in play in the real world. It is maybe for this reason that Pigou’s model for taxes and incentives hasn’t been entirely successful in eliminating externalities. This brings me back to last week’s article where Fullerton and Stavis said “no policy instrument is a panacea.” With economic models and policy, there is no blanket solution to the problem of externalities. While Pigou’s model is clearly more sound, it is still a model and has shortcomings when applied to the real world.
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