Coase, external costs, and lighthouses

Ronald Coase’s passing – at the ripe age of 102 – is an opportunity to recognize a substantial intellectual achievement. “The Problem of Social Cost” represents a major advance over Pigou in thinking about policy toward third-party effects. It does not deserve most of its “Coasean” followers (including Coase himself, in some moods) who want to act as if the problem had been eliminated rather than being reformulated as one of minimizing transactions costs and dealing with free-ridership. (Harold Demsetz makes the strong argument that the public-goods/free-ridership problem is more fundamental than transactions costs proper.

(A different critique, not often offered, is that the paper ignores the problem of extortion: it’s one thing for you to voluntarily pay to have me move my hog farm to improve the atmosphere around your mansion next door, and something else for me to buy the land next to your mansion and threaten to set up a hog farm unless you buy me out at a premium.)

“The Lighthouse in Economics,” by contrast, does not get within a million miles of proving what Coase and his followers think it proves. Yes, there were private-enterprise lighthouses in Britain. But there were never free-market lighthouses in Britain or anywhere else. Lighthouse construction and operation were supported by tolls – that is, taxes – collected at nearby ports. Of course a private enterprise can supply a public good if it has the power of the state to force someone to pay for it. So what?

In the end, the political economy of private lighthouses worked out so badly that it was decided to make them a public service after all, though still supported by shipping fees rather than out of general revenue.

How much of any given public good to provide (including the elimination of public bads such as air pollution), and how to pay for it, remain problems outside the reach of “free-market” dogmatizing. But that won’t, alas, prevent libertarians from pretending that waving their magic wands while shouting “Coase!” makes the problems go away.

P.s. Still waiting for some libertarian to notice the argument in Nozick’s Anarchy, State, and Utopia which demonstrates that Lockean principles cannot support the acquisition of private property in land, because the “enough-and-as-good” proviso unravels backwards.

Update John Cassidy expounds the differences between what Coase taught and what was taught in Coase’s name.