Excellent post. I have a small complaint on the Coase section though. Quoting for reference:
Suppose that, in a particular case, the pollution does $100,000 a year worth of damage and can be eliminated at a cost of only $80,000 a year (from here on, all costs are per year). Further assume that the cost of shifting all of the land down wind to a new use unaffected by the pollution—growing timber instead of renting out summer resorts, say—is only $50,000. If we impose an emission fee of a hundred thousand dollars a year, the steel mill stops polluting and the damage is eliminated—at a cost of $80,000. If we impose no emission fee the mill keeps polluting, the owners of the land stop advertising for tenants and plant trees instead, and the problem is again solved—at a cost of $50,000. In this case the result without Pigouvian taxes is efficient—the problem is eliminated at the lowest possible cost—and the result with Pigouvian taxes in inefficient.
With the numbers laid out, (and presuming the mill is more than $100k profitable), I agree that the “efficient” outcome is for the resort to convert to timber. However, the result with Pigouvian taxes is still efficient. This is because Friedman arrives at the wrong equilibrium result with taxes. It is possible this is because he has structured his taxes incorrectly—they aren’t properly taxing damages, but rather an intermediary which can cause damages.
I think the result that Coase would advocate is that in the presence of a tax on damages, the mill pays the resort owner $50k+1 to convert to timber. At that point, the damages are $0, and no Pigouvian tax is paid.
This is central to Coase’s realization. Conditional on the pre-existing endowments, we should arrive at the min-cost solution—the question is who bears the cost. In this case, imposing a Pigouvian tax transfers the burden from the resort owner to the mill owner.
It is possible this is because he has structured his taxes incorrectly—they aren’t properly taxing damages, but rather an intermediary which can cause damages.
I think your complaint is missing his main argument, which is that the taxes are more difficult to structure correctly than it would first appear. To quote the last paragraph:
But the problem of externalities applies to a wide range of different situations, in many of which it is far from obvious which party can avoid the problem at lower cost and in some of which it is not even obvious which one we should call the victim.
Excellent post. I have a small complaint on the Coase section though. Quoting for reference:
With the numbers laid out, (and presuming the mill is more than $100k profitable), I agree that the “efficient” outcome is for the resort to convert to timber. However, the result with Pigouvian taxes is still efficient. This is because Friedman arrives at the wrong equilibrium result with taxes. It is possible this is because he has structured his taxes incorrectly—they aren’t properly taxing damages, but rather an intermediary which can cause damages.
I think the result that Coase would advocate is that in the presence of a tax on damages, the mill pays the resort owner $50k+1 to convert to timber. At that point, the damages are $0, and no Pigouvian tax is paid. This is central to Coase’s realization. Conditional on the pre-existing endowments, we should arrive at the min-cost solution—the question is who bears the cost. In this case, imposing a Pigouvian tax transfers the burden from the resort owner to the mill owner.
I think your complaint is missing his main argument, which is that the taxes are more difficult to structure correctly than it would first appear. To quote the last paragraph: