MARKET FAILURE – THE ECONOMICS OF A. C. PIGOU

EXTERNAL COSTS & BENEFITS

MISALLOCATIONS OF RESOURCES:

· TOO MUCH IS PRODUCED WHEN EXTERNAL COSTS ARE PRESENT

· TOO LITTLE IS PRODUCED WHEN EXTERNAL BENEFITS ARE PRESENT.

HOW TO CORRECT THE PROBLEM?

· IMPOSE A “PIGOUVIAN TAX” ON THE PRODUCTION OF GOODS THAT GENERATE EXTERNAL COSTS.

· PROVIDE PIGOUVIAN SUBSIDIES FOR PRODUCITON OF GOODS THAT GENERATE EXTERNAL BENEFITS.


THE PROBLEM OF INCOMPATIBLE USE – THE COASE THEOREM

THE PROBLEM OF INCOMPATIBLE USE REFERS TO SITUATIONS WHERE ONE PERSON’S USE OF A RESOURCE INTERFERES WITH ANOTHER’S USE

THE PROBLEM OF INCOMPATIBLE USE IS OFTEN USED TO JUSTIFY GOVERNMENT INTERFERENCE WITH MARKET ALLOCATIONS OF RESOURCES

EXAMPLES OF THE PROBLEM OF INCOMPATIBLE USE –

AIR, WATER, NOISE, ETC. POLLUTION

CAR ACCIDENTS,

THE PROBLEM OF INCOMPATIBLE USE OCCURS BECAUSE THERE IS SOME “PUBLICNESS” IN THE CONSUMPTION OF THE RESOURCE

PUBLIC GOODS –

IF PUBLIC GOODS ARE PROVIDED TO ONE, THEY MUST BE PROVIDED TO ALL – NON-EXCLUDABILITY (IN EXTREME CASES LIKE NATIONAL DEFENSE)

GOODS THAT THE MARKET WON’T PROVIDE LIKE LIGHTHOUSES OR

GOODS THAT WE DON’T WANT MARKETS PROVIDE WELL, LIKE ARMIES

PUBLIC GOODS (BADS) HAVE “EXTERNAL” BENEFITS (COSTS)

NEGATIVE EXTERNALITIES ARE COSTS IMPOSED ON PEOPLE BY OTHERS’ ACTIONS

POLLUTION, CROWDED ROADS, E.G.

EXTERNALITIES CAN BE POSITIVE – BENEFITS ENJOYED BY PEOPLE FROM OTHERS’ ACTIONS

THE PROBLEM OF INCOMPATIBLE USE INVOLVES NEGATIVE EXTERNALITIES LIKE COASE’S EXAMPLE OF A RANCHER’S CATTLE TRAMPLING A NEIGHBOR’S CROPS

WHAT IS THE OPTIMAL HERD SIZE?

1. WHAT IF THE RANCH & THE FARM WERE OPERATED BY THE SAME PERSON?

2. WHAT IS THE SOCIAL OPTIMUM?

3. WHAT ARE THE RANCHER’S AND FARMER’S RIGHTS? (FENCE-IN OR FENCE-OUT?)

COASE SAID:

1. IF PROPERTY RIGHTS ARE DEFINED, AND

2. TRANSACTIONS COSTS ARE ZERO (OR, AT LEAST LOWER THAN THE BENEFIT/COST INVOLVED)

THEN:

1. THE INITIAL ALLOCATION OF RIGHTS DOESN’T MATTER, THE FINAL ALLOCATION WILL ALWAYS BE THE SAME.

2. THE RESULT WILL BE OPTIMAL WITHOUT OUTSIDE INTERVENTION.


HENCE, THE MARKET WILL ALLOCATE “EXTERNAL” COSTS EFFICIENTLY.

EXAMPLES:

AIRPORT NOISE – INDIVIDUAL CHOOSE LAND USES NEAR AIRPORTS UNAFFECTED BY NOISE – WAREHOUSES, E.G.

POLLUTION – PEOPLE CHOOSE TO LIVE IN CLEANER AREAS

THE MARKET CANNOT CURE ALL AILS, BUT IT DOES BETTER THAN MOST THINK

MORE EXAMPLES OF THE COASE THEOREM IN ACTION

THE HATFIELDS & MCCOYS EXAMPLE – THE RIGHT OF TRESPASS

HISTORIC CHARLESTON, SC PROPERTY LINES

THE RIGHT OF TRESPASS TO MAKE REPAIRS

JUDGE YOUNG: NO RIGHT EXISTS IN THIS CASE – THE APPELLANT LIVED ON A CORNER LOT

JUDGE YOUNG: THE COASE THEOREM DOESN’T WORK – THE RIGHT IS NOT ASSIGNED TO THE MOST VALUABLE USE.

THE REST OF THE STORY – HIRE A LOBBYIST, GET THE LAW CHANGED!

THE PARABLE OF THE PARKING LOTS

· PARKING AT A FOOTBALL STADIUM IN A COLLEGE TOWN

· EARLY ARRIVERS PARK FOR FREE ON STREETS

· BOOSTERS PARK IN RESERVED LOTS (WHICH THEY PAY FOR)

· PAY TO PARK LOTS CHARGE BASED ON THE DISTANCE TO THE STADIUM – BUT THEIR ABILITY TO RAISE PRICES IS LIMITED BECAUSE OF PRIVATE PROPERTY OWNERS CHARGE TO LET PEOPLE PARK IN THEIR DRIVEWAYS AND YARDS

· PARKING LOT OWNERS FORM “APPLE” – THE ASSOCIATION OF PROFESSIONAL PARKING LOT EMPLOYERS

· THEY PETITION CITY HALL TO BAN PARKING IN PRIVATE YARDS – “TO PROTECT THE PUBLIC’S HEALTH AND SAFETY”

· ORDINANCE REQUIRES $25K IN LIABILITY INSURANCE AND A $500K BOND TO CHARGE FOR PARKING AND MADE FEE PARKING W/O MISDEMEANOR PUNISHABLE WITH A $100 FINE AND UP TO 60 DAYS IN JAIL FOR REPEAT OFFENDERS.

· TRAFFIC CONGESTION & LINES AND MASS CONFUSION REIGNS AT PAY LOTS

· CAR WASHES FOR $5, CONSIGNMENT SALES LOTS SPRING UP – THE RESULT IS THE INITIAL (EFFICIENT) ALLOCATION OF PARKING SPACES. THAT’S THE COASE THEOREM AT WORK

MORE PARKING STORIES – PARKING ON CAMPUS

· THE VALUE OF PARKING SPOTS IS A RENT

· PARKERS BEAR SEARCH AND TRANSACTIONS COSTS TO GET THE RENT – BETTER SPOTS

· CAMPUS PARKING RULES PUT DIFFERENT VALUES ON TRANSACTIONS COSTS DIFFERENT GROUPS MUST BEAR:

o STUDENTS HAVE LOW VALUE TRANSACTIONS COSTS

o FACULTY HAVE HIGHER VALUE TRANSACTIONS COSTS

o ADMINISTRATORS HAVE THE HIGHEST VALUED TRANSACTIONS COSTS (OR, AT LEAST THEY THINK SO & THEY DO MAKE THE RULES)

RESIDENTIAL PARKING AROUND CAMPUS – “RESIDENT ONLY” STATUS

RESIDENTS BORE HIGH TRANSACTIONS COSTS TO GET THE CITY TO DESIGNATE THOSE SPOTS TO THEM TO AVOID A HIGHER TRANSACTION COST OF HAVING TO LOOK FOR A PLACE TO PARK EVERY DAY

PORTLAND’S “USING THE STREET AS A GARAGE ORDINANCE” – WHAT SENSE DOES THAT MAKE?

PREVENTS RESIDENTS FROM TAKING UP STREET PARKING IF THEY HAVE ROOM TO PARK ON THEIR PROPERTY

OPEN PARKING IN BIG CITIES VS. SMALL

SMALL TOWNS PLACE VERY FEW RESTRICTIONS ON PARKING – IT’S A LOW VALUED GOOD

BIG CITIES PUT LOTS OF RESTRICTIONS ON PARKING – IT’S A HIGH VALUED GOOD

DOUBLE PARKING IN NYC – A FORM OF QUEING

PARKING AT THE MALL

CRUISERS VS. FIRST AVAILABLE SPOT

DEPENDS ON HOW YOU VALUE THE RENT VALUE OF A GOOD SPOT VS. VALUE OF SEARCH TIME

PARKING SPACES GET ALLOCATED EFFICIENTLY – THE COASE THEOREM

“YARDBIRD LAW SCHOOL ADMISSIONS”

HOW DO WE ALLOCATE ADMISSION “RIGHTS” WHEN TUITION IS BELOW THE MARKET CLEARING PRICE?

WHAT IS THE NATURE OF “PROPERTY RIGHT IN ADMISSION? – NON-TRANSFERABLE

WHAT IS THE OBJECTIVE OF THE LAW SCHOOL? PICK THE BEST POTENTIAL LAWYERS

ALLOCATION SCHEMES:

1. LOTTERY

2. LSAT SCORES

3. FIRST IN TIME, FIRST IN RIGHT

4. RESIDENCY

5. RECOMMENDATIONS FROM ALUMNI

6. RAISE TUITION

HOW WILL THESE WORK?

WHO GETS IN UNDER EACH SCHEME?

WHICH SCHEME ACHIEVES THE SCHOOL’S GOALS

WHAT HAPPENS IF THE RIGHTS ARE TRANSFERABLE?