A post about anything other than Thatcher 3: Limits to Coase

In the course of the day job I was speaking to someone in BA’s senior management. They were lamenting that Heathrow needs another runway, that everyone in the industry knows that Heathrow needs another runway, but that Heathrow was not going to get another runway because local opposition was too fierce.

“Why don’t you just bribe them” I asked, channelling Coase.

“We offer sound proofing of course, but its not enough,” came the despondent response.

“What about actually bribing them, you know, with money?” I asked a little incredulously.

I’d summarise the response as “splutter, gurgle, haha,” but it could have been bluer.

In real life, as loathe as I am to use the phrase, people don’t get bribed and people don’t bargain because doing so is weird.

Coase’s brilliant essay “The Problem of Social Cost” describes how mutually beneficial bargaining can help to eliminate the problems caused by externalities.

Imagine an airport which produces noise pollution. Now imagine that it has been built in a densely populated and wealthy part of the country. Seems fanciful I know, but bear with me. This airport wants to expand, and could expand very profitably, but locals, fearing an increase in noise and disruption don’t want it too.

The airport wants to produce an externality, noise. You can think of other people as owning a right not to be disturbed. To expand, the airport should compensate those who it will disturb. That’s only fair. You could have government tax and redistribute the airports profits but that’s messy and inefficient. There’s a simpler solution: bargain, split the profits, and everyone can be a winner. A cheque in the post every month for everyone in TW6.

In Coase’s world the limiting factor is transaction costs. Transaction costs are the costs of doing business, they include the cost of bargaining, of contracting, of working out who’s involved and many other things. Bargaining occurs when it is profitable so long as it is not too difficult to find the people involved and draft an agreement between all the parties involved. But this has not happened.

What’s interesting is that the failure to bargain has not happened in a way predicted by Coase.

The interested parties are well known and an extensive dialogue has been ongoing for some time. Legal settlements have already been reached. Transaction costs are low. But instead of offering locals a simple bribe, they  have been offered a more complicated solution involved sound proofing and vague promises of employment.

According to Coase this shouldn’t happen. Everyone involved has been working to increase transaction costs and has been moving further away from a settlement. A simple solution is right: there take the damn money! But people are leaving that money on the table.

The Overton Window is a concept which describes the range of ideas which are politically acceptable. Bribery has a long record of being clandestine and immoral and is well towards the unthinkable end of the Overton Window as far as policy is concerned. However, we can also think of a bribe as a payment for a service. In this case a bribe should be offered for the service of not raising legal or political complaints about noise. But people don’t like bribes, and that appears to be the end of that.

The Coase Theorem is a beautiful idea, but a great deal more prevents mutually beneficial exchange than transaction costs. The ideas which are fashionable will shape and distort the way people bargain and the deals people accept. It appears that Britain is a country uniquely adverse to bribery, at least if Tim Worstall can be believed. This might be a good thing overall, but it appears this aversion can also make us all poorer too.

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3 thoughts on “A post about anything other than Thatcher 3: Limits to Coase

  1. Interesting. Another consideration is that sound-proofing and vague promises are much cheaper than bribery. Here in Canada we’re having parallel debates about pipelines. There is no way that companies could ever afford to bribe people enough to remove opposition to the pipeline – there are too many people whose livelihood is at stake, or who see this as a moral issue.

  2. I think the previous two commenters have summed up the reality, but it’s worth making explicit.

    Compensation for projects happens all the time (e.g. numerous wind farms in rural areas.) If you take away the emotive word “bribery” you’ll find that the airport and airlines are unwilling to make an offer of compensation that will persuade the residents.

    For Heathrow this is because meaningful compensation would be enough to let someone move to another equivalent part of London if they need to (for example to change jobs.) But property prices make this not a small number.

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