Naked Economics: Undressing the Dismal Science pdfdrive com

party to change their behavior. When my neighbor Stuart started playing his
bongos, I could have paid him to stop, or to take up a less annoying instrument.
If my disutility from his noise is greater than his utility from playing, I could
theoretically write him a check to put the bongos away and leave us both better
off. Some contrived numbers will actually help to make the point. If Stuart gets
$50 of utility from banging away, and I feel the noise does $100 an hour of
damage to my psyche, then we’re both better off if I write him a check for $75 to
take up knitting. He gets cash that does him more good than the bongos; I pay
for silence, which is worth more to me than the $75 it costs.
But wait a minute: If Stuart is the guy making the noise, why should I have
to pay him to stop? Maybe I don’t. One of Coase’s key insights is that private
parties can only resolve an externality on their own if the relevant property rights
are clearly defined—meaning that we know which party has the right to do what.
(As we’ll explore later in the chapter, property rights often involve things far
more complicated than just property.) Does Stuart have the right to make
whatever noise he wants? Or do I have the right to work in relative quiet?
Presumably the statutes for the city of Chicago answer that question. (The
answer may depend on time of day, giving him the right to make noise up until
some specified hour and giving me the right to silence during the nighttime
hours.)
If I have the right to work in peace, then any payment would have to go the
opposite direction. Stuart would have to pay me to start banging away. But he
wouldn’t do that in this case, because it’s not worth it to him. As a
temperamental writer, the silence is worth $100 to me, so Stuart would have to
pay me at least that much to endure the noise. Playing the bongos is only worth
$50 to him. He’s not going to write a check for $100 to do something that
provides only $50 of utility. So I get my silence for free.
This explains Coase’s second important insight: The private parties will
always come to the same efficient solution (the one that makes the best use of
the resources involved) regardless of which party starts out with the property
right. The only difference is who ends up paying whom. In this case, the
disputed resource is our common wall and the sound waves that move back and
forth across it. The most efficient use of that resource is to keep it quiet, since I
value my peaceful writing more than Stuart values his bongo playing. If Stuart
has the right to make noise, I’ll pay him to stop—and I get to write in peace. If I

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have the right to silence, Stuart won’t be willing to pay enough for me to accede
to his bongos—and I get to write in peace.
Remarkably, this kind of thing actually happens in real life. My favorite
example is the Ohio power company that neighbors claimed was emitting “a
bizarre blue plume” that was causing damage to property and health. The Clean
Air Act gave the town’s 221 residents the right to sue the utility to stop the
pollution. So the American Electric Power company had a decision to make: (1)
Stop polluting; or (2) pay the entire town to move somewhere else.
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The New York Times reported on the answer: “Utility Buys Town It Choked,
Lock, Stock and Blue Plume.” The company paid the residents roughly three
times what their houses were worth in exchange for a signed agreement never to
sue for pollution-related damages. For $20 million, the utility’s problems packed
up and went away—literally. Presumably this made financial sense. The New
York Times reported that this settlement was believed to be the first deal by a
company to dissolve an entire town. “It will help the company avoid the
considerable expense and public-relations mess of individual lawsuits, legal and
environmental experts said.”
Coase made one final point: The transactions costs related to striking this
kind of deal—everything from the time it takes to find everyone involved to the
legal costs of making an agreement—must be reasonably low for the private