The Coasean State

One justification for property rights is dispute resolution: resources are scarce, and private ownership helps reduce conflict over them. By establishing an enforced system of rules that determine ownership of goods, we can create an environment allowing for the best use of resources (property rights allow for a pricing process — most likely an unintended result of early institutions of property). Who determines these rules? In part, they are determined spontaneously. We are implicitly shaping rules when we trade property rights in a division-of-labor. Oftentimes, however, trade through markets is made unattractive by transaction costs. Thus, we also need, for example, legal and political systems.

When discussing property right exchange, Coase was specifically addressing the problem of negative externalities: costs which are imposed on an unwilling party. A factory, for example, might pollute, damaging neighboring houses. Or, a cattle rancher may not be able to fully control his cattle, which graze on land which does not belong to him. These people are consuming resources which are claimed by others, causing a dispute. The Coase Theorem states that, assuming zero transaction costs, existing property rules are irrelevant, because the parties involved will flesh out their own rules for their own particular situation. But, when transaction costs are positive, disputes may have to be resolved in other ways.

When we think of property disputes with no Coasean solutions we turn to the legal system. At least, this has been the main application of Coase’s theory. When parties cannot privately resolve a conflict, they need someone to arbitrate between them (ignoring the possibility of outright violence). On what basis does the justice system solve these conflicts? Whatever the standard, legal systems are also built on rules — not just rules that minimize inefficiency and injustice within the organization, but also rules which help arbitrators reach solutions. These rules are not the best solution all the time, but we want the ones that maximize the probability of a “good” solution for each trial. But, what if there is a conflict that a court, or a private defense agency, or an arbitrator, can’t resolve?

When a dispute involves a few people, private solutions may be easy. The legal system helps extend the range of private solutions, but it can’t solve everything. While a court might order a factory to build a smokestack, it’s more difficult for a court to impose that ruling on every factory externalizing its costs on its neighbors. These other factories might one day also be brought to court, and the ruling may still usually be on the side of the victim, but the process can be long, expensive, and not very satisfying — and, there may be some factories that aren’t brought to court at all (maybe it’s too expensive, because the externalized costs are too widely dispersed). We may need other organizations, working with a different set of rules, to resolve issues that are too costly for Coasean solutions or the legal system.

One such alternative is the state. There are many kinds of states, so to keep things simple let’s assume we are working with an “ideal” representative democracy. What I mean by ideal is that a constitution, with more-or-less unanimous consent, binds (constrains) a set of institutions and organizations of governance. These may include, for example, a bicameral (multicameral?) legislature, a division of power within governments, a division of power between various local, regional, and national governments, et cetera. Different organizations, such as the House and the Senate, may have asymmetric sets of rules; different legislatures, for example, may have different voter sources, different rules of proceeding, and so on. Decision-making need not be unanimous, as long as there is agreement with the overall rules of the game.

We don’t need to narrow down property rights disputes to things like pollution, there are many social conflicts that an economic imperialist could classify as property disputes. Discrimination imposes costs on the discriminated — psychological costs, for example. Think of the costs to women — not only foregone wages and profits, but also potential psychological burdens — a biased, limiting culture may cause. The “right to discriminate” can come at the expense of the discriminated (which is why it makes dubious sense to believe in an absolute right to discriminate/disassociate). People may also want to impose certain “meta-rules” on other institutional sets, such as markets or the legal system, as well. For example, a division-of-labor may only fully agree to associate if there is a general rule to minimax the position of the worst-off.

If we frame the state in the context of property rights, it no longer seems so alien. Humans develop rules that govern their claim to property, including their claim over each other. Some of these rules are flexible on a very simple level. Some property rights can be defined with a simple exchange between parties. But, costs to these types of transactions make alternative organizations and rules, such as the legal system, attractive. Like the legal system, governments have their own asymmetric set of rules, and they have a comparative advantage when resolving certain property disputes.

It might be worth thinking beyond “property disputes.” Just like property is one way of resolving certain conflicts, maybe there are other ways, or other kinds of conflicts that can’t be resolved through property rights. And, just like there are “private” solutions to these other conflicts, there are “public” solutions as well.

One thought on “The Coasean State

  1. Seth MacLeod

    Regarding pollution and factories, here is an excerpt from John Hasnas’ piece ‘Two Theories of Environmental Regulation’ — footnote 53 (page 26 of the PDF):

    What would such lawsuits look like? How can there be a lawsuit when those whose property has been damaged do not know which polluter to hold responsible? But the common law has encountered this problem before and has already evolved a response to it: market share liability. In cases in which the plaintiff has been damaged by a product produced by several manufacturers, but cannot identify the particular manufacturer who caused his or her injury, the plaintiff may join all available manufacturers as defendants. As long as the defendants constitute a substantial share of the market for the offending product, the plaintiff can recover damages from each defendant in proportion to the defendant’s share of the market for the product at the relevant time.

    What if an individual property owner’s damage is too slight to make it worthwhile to pursue a law suit? But the common law has encountered this problem before and has already evolved a response to it: the class action lawsuit that allows the joinder of many small claims of damage presenting essentially the same factual issues into one suit.

    Won’t polluters merely regard lawsuits as a cost of doing business to be absorbed, and continue with their polluting activities? Perhaps, but the common law has encountered this problem before and has already evolved a response to it: the injunction. In trespass and nuisance suits, a plaintiff can sue not merely for damages, but for an injunction that orders the defendant to refrain from the activity that is causing the plaintiff’s injury.

    The essential characteristic of the common law is that it learns. At any point in time, there are interpersonal wrongs that it does not adequately address. But it is precisely these inadequacies that spur the legal innovations that produce new procedures and remedies. I can describe how the common law would be likely to handle lawsuits over acid rain because the problems that beset such suits are similar to those that have arisen and been resolved in the past. I cannot, however, predict how the common law will address novel environmental problems that present entirely new challenges. This is precisely the reason for advocating common law environmental regulation: to learn how to align private incentives with the preservation of resources that are not easily reduced to physical possession.

    Hasnas’ argument is that instead of relying on the political legislative process to resolve these issues, it is better to use a common law process so that effective resolutions can be copied and then be incorporated into law.


Leave a Reply

Your email address will not be published. Required fields are marked *