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coase’s anti-theorem

Ron Coase is well known for writing a small number of hugely important articles. The top two are the papers that presented Theory of the Firm and “Coase’s Theorem.” There is a third that gets a bit of discussion, The Lighthouse in Economics. The wiki summary gives you the gist:

This paper challenges the traditional view that lighthouses are examples of public goods by showing that privately owned lighthouses existed in England. Coase aligned lighthouses more with club goods because they are excludable by way of charging port fees. Stopping short of a full analysis, the paper is generally viewed as an excellent insight into the dimensions of public goods and an invitation by Coase for a full economic analysis of the lighthouse.

This is usually seen as a defense of markets. Just because something is a non-excludable good, it doesn’t follow that it can’t possibly be provided by private means. In Coase’s case, he found that lighthouses can be privately owned.

I think there’s a flip side to this kind of argument. Just as public goods might be privately provided, many services can be satisfactorily provided by other sorts of non-private institutions. My argument isn’t about excludable goods, it’s about one of Coase’s empirical observations. In Coase’s article, he mentions the existence of private, public, and hybrid lighthouses. Obviously, there are a variety of political coalitions that support these arrangements.

So I present an anti-theorem*: The institutions that can provide a public good at some minimal level are varied. For each institutional arrangement, there is likely some coalition that is willing to vote/pay for it.  In other words, nations probably have multiple market/political equilibria that can generate a wide range of sustainable policies. Furthermore, inertia will guarantee that these varied policies will have a considerable life span. The take home point is not to think about policies as optimal technical solutions. Instead, one should think first about the relative strength of the coalitions available when the institution was created and the range of supportable outcomes.

* An anti-theorem: An additional observation that is intended to undermine an earlier insight. In this case, Coase was trying to make way for market based solutions to public goods problems. My point is that the range of observed organizational forms indicates that there’s no particular reason to believe that the market solution will be popular, given that it’s just one of a range of solutions, each with differing, possibly superior, economic and political attributes.

Written by fabiorojas

August 25, 2009 at 12:47 am

Posted in economics, fabio

4 Responses

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  1. In other words, nations probably have multiple market/political equilibria that can generate a wide range of sustainable policies.

    You might consider checking out Peter Gourevitch’s 1984 book Politics in Hard Times if you haven’t seen it. He made a very closely related point regarding trade policies: economic interests can tell you who will benefit or suffer from liberalization or protection and thus who will support or oppose those policies, but it can’t tell you which coalition gets its way.

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    jpferguson

    August 25, 2009 at 1:39 am

  2. Path dependence matters. Fabio makes the case that political solutions to the provision of public goods may be far from optimal (efficient), but long-lived if there is no political coalition strong enough to undo what has been institutionalized.
    One should study the outcomes of the Rural Electrification Act of 1935. It was an economic stimulus package with a $410 million budget envelope to bring electricity to the 90% of rural residents without power. Low-interest loans were made from this envelope to municipalities and other publicly owned firms, investor-owned firms, and cooperatives (i.e. user-owned firms). The vast majority of the new suppliers were cooperatives; about 650 still exist today. IOFs wouldn’t invest in the low-density markets. Public authorities found it hard to build the coalitions to organize. (Pop ecologists might find an isomorphism tale here.) The coops have merged and formed federations over time, but have retained their user-ownership.
    All three forms of organizations provide electricity in the US, once we get beyond the rural market. Recent studies by the Congressional Research Office put the per-customer governmental subsidies for all IOF utilities at $35, all municipal utilities at $57, and rural electrification coops at $8. (from testimony before the Federal Regulatory Commission: http://www.nreca.org/Documents/PublicPolicy/AD05_17_062606_fin.pdf )
    Fabio is right. Alternative institutions for providing public goods (in this case, electricity) coexist. They are long-lived. I suspect there are few defections from one form to another. And they are long-lived even if they are proven to be less efficient.

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    REW

    August 25, 2009 at 2:44 am

  3. Thanks on both comments – I’ll have to read some of that stuff,esp the Gourevitch book.

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    fabiorojas

    August 25, 2009 at 4:29 am

  4. Isn’t this similar to Jack Knight’s work in which relative bargaining power is seen as instrumental in institutional implementation?

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    Trey

    August 25, 2009 at 4:17 pm


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