The Faith Heuristic: The Caplan-Hanson Debate: The factory does not have the right to damage someone else's property. Coase overturned this view. You could just as easily say that the people who lived downstream want to force the factory to stop making widgets. The people who live downstream are infringing on the rights of the factory. Coase realized that there is an unavoidable tradeoff between clean rivers and more widgets. It is wrong to simply choose one side of the tradeoff. Afterall, the whole point of tradeoffs is that you have to consider the costs on both sides. Suppose the factory produced life-saving drugs?
Coase's insight is that you need to look at the costs of getting each to change their behavior. Suppose the homeowners could clean the river at a cost of one dollar per widget and the factory could stop polluting at the cost of two dollars per widget. Then the home owners are the least cost avoiders. The efficient outcome happens when the least cost avoiders change their demand to accommodate the other side.
This insight launched the school of Law and Economics and inspired the modern libertarian movement. See Law's Order by David Friedman, son of Milton Friedman, for a defense of this school of libertarianism. I think Friedman is correct that Justice has a family resemblance to efficiency. But it clearly breaks down in some cases. Consider slavery. There is an unavoidable tradeoff between letting slaves keep the fruits of their own labor and having that go to the slave owners. How does the Law and Economics crowd respond?
I've always assumed, wrongly it appears, that they would argue that the slaves could never be the least cost avoider. But I stand corrected. I learned in the debate that they would bite the bullet and accept slavery and genocide. I also like Brad DeLong's point that putting efficiency first gives each person a weight inversely proportional to their marginal utility of wealth. In other words, Bill Gates counts massively more than others.
Comments