The Coase theorem: Its applicability as a bargaining game and it’s disadvantages
This theorem referred to as coase is an economic theory which was formulated by Ronald Coase in the 1930’s, where the definition according to Coase is that when trading in an externalities with no transaction costs, and there is use of bargaining can lead to an efficient outcome irrespective of the the property rights initially allocated (1960). With time the theory has faced a number of modifications, proofs and criticisms which eventually has caused it to evolve. In its revised state it is a theory that cuts across the principles of tort law and economics (Coase 1). The understanding and application of the theory has put the emphasis that under certain conditions, no inefficiency or DWL (deadweight loss) are caused by externalities and thus no government action is needed because, the legal assignment of property rights will have nothing to do with how economic production is ordered. The end result being that there will be effective bargaining (North 19). In this case scenario the issue arising is that the Iowa city law dictates no open container alcohol in public with a penalty of $100, and while David is offering space for tailgating which involves people sitting on their open vehicles and in most occasions also involves consumption of alcoholic beverages it is natural that the driveway will always be used during game days.
David’s predicament with the users of his property for tailgating and the Iowa city laws can be likened to the example given by Robert Coase whereby he gave an illustration of a train which was passing through a wheat farms and the sparks from the rail resulted to a fire that caused destruction to the farmers wheat (14). The theory tends to consider the property rights vis a vis the resultant harmful effects on others and the most amicable way of solving problems that arise in such or similar social arrangements. This is normally preceded by the divergence that exists between private and social factors which determine the option of choices available to the parties involved. The key issue is always to ensure that the more serious harm is avoided and this could only be achieved through the mechanism of bargaining. To elaborate this in David’s situation and the concept of bargaining in the theory, the people would rather use David’s private parking other than the public parkings since they are free to tailgate which if done in public then it is a criminal misdemeanor with a penalty of about $100. Since there are other people like David who transact in this manner then the concept of internalization also known as the pigouvian solution can be utilized (Coase 12: Cooter 24). Internalization occurs when the owner/s pay taxes or subsides to the Government which culminates to the internalization of the externality and in the same vein, the group can maximize their joint welfare or profits as property owners and because of their group size the possible transaction costs will be lower than the individual payments that could have been made by each person. Since the private parking provided by the City is limited, the local authority in the town of university heights, since it is a department of the Government and for that fact can easily influence the production factors by simply making an administrative decision. With that in mind the Iowa city local authority could introduce payment of taxes to such services and letting David and such other users continue with their arrangement. The probability of how such an arrangement will work also depends on viable harm that can be caused to the neighbour’s for example if it could result to nuisance.
Conclusion
In view of the foregoing, the state of the economic welfare and the operation of the theory normally varies according to specific situations. When choosing a social arrangement one should always consider the resultant change in the existing system which could either be a positive change in some decision while it also negatively affect others. Existing factors should always be put to consideration, the costs to be incurred in operating the social arrangement and whether the arrangement will work for the government or the current market should be mainly considered but above all the total effect of such an arrangement is prime.
Work cited.
Coase, Robert. “ Problem of Social Cost” Journal of Law and Economics. 1.1 (1960) 1-44. 8th October 2008
;http://www.journals.uchicago.edu/doi/abs/10.1086/466560;
Cooter, Robert and Thomas Ulen. Law ; Economics . 5th ed. Pearson, 2007.
North, Gary. “The Coase theory.” A study in Epistemology .( March 1992).
8th October 2008
;http://www.amazon.com/Coase-Theorem-Study-Economic-Epistemology/dp/093046;
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