History of Economic Thought. Externalities and Ronald Coase's theorem (most important)

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History of Economic Thought. Externalities and Ronald Coase's theorem (most important)

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87. EXTERNAL EFFECTS AND RONALD COASE'S THEOREM

External effects - these are costs and benefits that apply to people who do not directly carry out material or monetary costs, but use the by-products of the activities of others (or bear additional costs).

These effects cost nothing to the user. But the gain or, on the contrary, the loss they receive is undeniable.

Ronald Coase (b. 1910, Nobel laureate 1991) believes that the state is not able to effectively solve the problem of externalities. It cannot correctly assess the size of external costs (for example, in the case of building a railway, environmental pollution, etc.), compare losses and benefits, and agree on the interests of the parties.

Funds redistributed by the state often do not go to those who need to compensate for the costs incurred or make up for unforeseen losses. The participation of the state in solving such issues requires considerable costs and thereby increases external costs.

The meaning of the conclusionWhat Coase came to is the following: the presence of externalities cannot serve as a basis for government intervention.

Whenever externalities occur, the problem can be resolved by agreement between the parties concerned. At the same time, external effects turn into internal ones and prerequisites are created for achieving the desired efficiency.

Coase formulated the conclusion: "Direct government regulation does not always give better results than simply leaving the problem to the will of the market or firm." This conclusion is called Coase theorem.

Coase argues that the parties can negotiate among themselves and resolve the problem of externalities without outside arbitrage.

They can come to an agreement if they have two conditions:

1) property rights must be clearly defined - the rights of ownership and use, management and alienation, protection and liability;

2) the cost of the agreement (agreement) to be concluded should be relatively low. If the size of the negative effects is very significant (for example, during the construction of a large enterprise with hazardous production), then in this case it is advisable to involve the state. As noted Coase, the problem of side effects can be solved by agreement of interested parties. Such an agreement is desirable and advisable, but not always possible.

If property rights are established and delimited, it is relatively easy for the parties to arrive at the desired result. Reaching agreement does not depend on which of the two parties is the owner. They are able to independently resolve controversial issues, as a rule, without state intervention.

But the theorem put forward Coase, is not always applicable. An agreement cannot be reached without external intervention if a significant number of people are involved in the dispute, and the set of negative effects is very large.

Author: Tatarnikov E.A.

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