Economics Dictionary of ArgumentsHome
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| Social cost: Social cost in economics is the total cost of an economic activity, including both private costs and external costs borne by society (e.g., pollution). It reflects the true impact of production or consumption on overall welfare and is key in assessing market failures and guiding policy decisions like taxation or regulation. See also Externalities, External cost, Emissions, Social goods._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Ronald Coase on Social Cost - Dictionary of Arguments
Kiesling I 19 Social cost/Coase/Kiesling: „The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is: how should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm.“(1) Example: A town has a river running through it, with a running path and park along the river, a boat launch for kayaking and fishing, a water treatment facility, and a paper mill (see Yandle 1998(2)). The paper mill produces products and sells them to consumers who value the products. This transaction defines the mutuallybeneficial interaction between parties at the heart of human exchange. The paper firm earns profits from paper sales when its revenues exceed its costs, and paper consumers earn net satisfaction when they derive more benefit from the paper than the cost to them of purchasing it. Both parties weigh benefits and costs in making their choices over resource use. Problem: If we examine the paper mill’s production more closely, though, we see some costs that may not be reflected fully in the accounting costs we typically associate with such a calculation. For example, producing paper generates waste by-products. Competition: The firm competes for consumers’ business, so it has strong incentives to minimize costs. Disposing of waste is costly, so the paper firm has an incentive to discharge its waste into the river if it can do so at no cost. That waste depletes oxygen in the water and is unattractive, so the company’s “free” waste disposal may create costs that other river users have to bear. Kiesling I 20 But because the paper firm does not pay for disposing of its waste in the river, neither the producer nor the consumer of paper, the two parties to the market transaction, bear that cost. Cost: Instead, the cost shows up in diminished enjoyment of the riverside park, less pleasant kayaking and reduced fishing, a lower quality ecosystem due to depleted oxygen, and additional costs of treatment for water consumption. Coase: Coase called this problem “the problem of social cost” and wrote an article of the same name on the topic in 1960(1). >Externalities/Pigou. Pigou’s analysis(3) implied a specific policy recommendation, specifically, a tax on paper to reflect the per-unit cost of the discharge into the river, or a regulation on the paper mill to induce it to incorporate the cost of its discharge into its accounting. Kiesling I 21 This logic has come to be known as “polluter pays,” or that a party that creates a cost should be the one to bear it. A. Solution/CoaseVsPigou: Coase looked at such problems differently, asking instead what the leastcost way of dealing with this problem was, assessing it as a problem of a conflicting use of a resource. This way of thinking about the problem identifies its property rights origins. While Pigou implicitly assumed that the “non-polluter” party has the right to be free from this harm, Coase instead acknowledged that in such cases the property rights definition is not necessarily clear, and that transaction costs limit the ability to define and enforce property rights. >Property rights/Coase. B. Problem/CoaseVsPigou: A related difference in Coase’s approach to the problem of social cost is to see the external cost problem as a reciprocal problem. Pigou: In Pigou’s analysis, the paper mill creates the waste discharge, the confectioner creates noise, and those actions impose costs on others. CoaseVsPigou: Coase argued that this framing of the problem is incomplete, because it misses the fact that the parties impose costs on each other precisely because they have different uses of the shared resource when property rights are not sufficiently well-defined. The paper mill wants to use the river to discharge waste, while the water treatment plant wants clean water to process for consumption, and the kayaker wants an attractive and clean river for recreation. At its core the problem of social cost is a dispute over property rights: “For Coase, natural resource and environmental protection problems typically arise when there is a need to balance these conflicting interests. Compensation: Whether an actor or group of actors is the ‘victim’ or ‘perpetrator’ of an ‘externality’ is fundamentally a question of who has the rights to engage in the activity concerned and if they wish to trade such rights for compensation” (Pennington 2015(4): 95). Coordination/cooperation: Coordination is difficult, and valuable resources become dissipated, because ownership is undefined. Collective goods: With there being no owner of the river (or the water that flows through it), the pollutant-emitting mill does not pay for the costs it imposes. Barggaining: Hence, bargaining over resource use, where the highest bid for the resource is identified, does not occur. The harmful effects from paper production may destroy clean water - even if clean water has a much greater social value. Kiesling I 22 Innovation/CoaseVsPigou: Coase argued that bargaining is a process that enables parties to learn and discover and to create through innovation lower-cost ways of mitigating such costs. In contrast, the Pigouvian approach presumes that the regulator knows the relevant costs and benefits well enough to determine the exact tax to impose to elicit the exactly optimal amount of paper production. PigouVsPigou: That presumption is unrealistic, as Pigou came to acknowledge later in his life. Cooperation/payments: After figuring out the best way to deal with the harm, the next logical question is, who pays for the filter—the water treatment facility or the paper mill? Where the law establishes property rights, it will be clear. If the mill has the right to pollute, the water treatment plant will pay. If the water treatment plant owns the water, the mill pays. Both parties have incentives to cooperate in enacting this solution if the cost of stopping the pollution is less than the value gained by allowing it to continue. Benefit: Crucially, this is also the requirement for societal gains–that the benefits exceed the costs. Special cases: Coase noted that such straightforward solutions might not unfold in cases where decision-making is decentralized, i.e., where property rights are not defined or in instances where transaction costs have kept the parties from making efficient bargains. In those instances, Pigouvian policies, such as a regulation mandating that paper mills install filters, might prove superior. But neither the market negotiation nor the regulatory approach is free. The two approaches should be compared and contrasted for their ability to foster social coordination, maximizing the value of the resources involved. >Property rights/Coase, >Transaction costs/Coase. Kiesling I 23 Transaction cost/externalities/Coase/Pigou/Kiesling: (…) when defining property rights is prohibitively costly or not feasible (as in, say, air pollution), bargaining to negotiate transfers of rights cannot happen. Property rights definition and enforcement costs are a category of transaction costs. Low transaction cost: Situations with low transaction costs are more likely to see welfare-enhancing bargaining, while … High transaction cost: …high transaction costs can prevent such conflict resolution. Example: An example of Pigou’s that Coase discusses for other reasons illustrates the challenge of transaction costs: the operation of a railroad through rural land in the 19th century. Railroad companies purchased land and built rail networks to run trains pulled by coal-fired steam locomotives, which threw off sparks that could cause fires that destroyed some adjoining crops or woodlands. In a situation such as the transcontinental railroad in the United States, the railroad company operated over thousands of miles and could potentially emit sparks on land owned by thousands of different farmers. This situation and others like it present a considerable transaction cost challenge, one that is common in many situations where there is a conflict in resource uses. Bargaining: In order for the farmers to bargain with the railroad over the rights to emit sparks and the rights to unharmed crops enough farmers would have to gather together to represent the interests of all affected farmers - in other words, the transaction costs would be high. In situations like these, the courts determine which party has legal liability for harms created, and enforce compensation if necessary. Pervasiveness: An overarching theme of Coase’s work on social cost is that transaction costs are pervasive. Because of that pervasiveness courts are important institutions whose decisions have implications for both the efficiency of outcomes and the distribution of profits across parties. >Law/Coase. 1. Coase, Ronald H. (1960). The Problem of Social Cost. Journal of Law and Economics 3: 1-44. 2. Yandle, Bruce (1998). Coase, Pigou, and Environmental Rights. In Peter J. Hill and Roger E. Meiners (eds.), Who Owns the Environment? (Rowman & Littlefield). 3. Pigou, Arthur Cecil (1920/2013). The Economics of Welfare. Palgrave Macmillan. 4. Pennington, Mark (2015). Coase on Property Rights and the Political Economy of Environmental Protection. In Cento G. Veljanovski (ed.), Forever Contemporary: The Economics of Ronald Coase. Institute of Economic Affairs._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Coase, Ronald Kiesling I L. Lynne Kiesling The Essential Ronald Coase Vancouver: Fraser Institute. 2021 |
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> Counter arguments against Coase
> Counter arguments in relation to Social Cost
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