Thursday 28 August 2014

How to misunderstand the Coase theorem 2

Following on from my posting yesterday I see that someone does get the Coase Theorem. Writing at the Wall Street Pit Donald Marron says
Somewhere Ronald Coase is smiling. He identified that answer in 1960 in his famous paper, The Problem of Social Cost.

If the little girl has the property right to recline, then you can pay her not to do so. If you have the property right, you can install a Knee Defender.
Yes, but as I noted yesterday the problem here is that property rights are not defined.

Marron goes on the say,
But who should have the property right? Coase would say it depends–some people don’t like negotiating with other passengers. Given those “transaction costs” the right ought to be given to whichever person is most likely to want it most.

I’d bet on the “reclinee” not the recliner. Which might explain why more airlines now offer the ability to pay extra for more legroom. After all, United would rather you pay them than the little girl.
This answer, extra legroom, may not be about the airline collecting the payment which would otherwise go to the recliner since a seat with more legroom is not the same thing as a seat with less legroom. The amount of the externality is not reduce by having more legroom, the recliner may still recline just as much, its just that the reclinee is no longer affected by the reclining. So seats with more or less legroom are two different goods and thus the airline may simply be selling different types of goods to different types of customers.

1 comment:

Economists Do It With Models said...

Actually, one of the articles on the subject mentioned that the SeatDefender device that was used was not allowed, which would imply that the property rights are at least implicitly assigned to the recliner.