Name: Problem of Social Cost
ISBN: 9781539433408

Problem of Social Cost

The Problem of Social Cost is an article dealing with economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost-benefit analysis, and that nuisances that are often regarded as being the fault of one party are more symmetric conflicts between the interests of the two parties.

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ryan_j_naughtonApr 2022

I was drafting an extensive response to this, but I am on a time crunch with my work schedule. If you are honestly interested in understand optimal solutions to externalities and handling the problem of social costs, I would recommend checking out Ronald Coase's paper "The Problem of Social Cost" for which he won the Nobel prize.[1]

I will hopefully have time this weekend to draft my response.

The TLDR is that, their "right to noise" impedes upon your "right to silence" but also your "right to silence" impedes upon their "right to noise". Giving either side the complete right and banning the other side is effectively having one force its way upon the other. Forcing silence is by definition an externality as well -- it just happens to be the side you value. But there are better middle ground solutions where we balance the benefits of each side.

A very clean example of this is noise pollution next to an airport. If the houses next to the airport had a complete right to silence then we couldn't have airplanes. But if the airplanes had a complete right to noise, then quality of life around the airport would diminish way too much. Instead, the socially optimal solution lies in the middle. It is why zero pollution is actually NOT socially optimal as the costs of zero pollution are too high.

For each additional decibel produced, the marginal social costs increase at a faster rate. Thus, people whispering at the beach or playing very low music such that it is quickly drowned out by the sound of the waves and the birds after 5 feet of distance is fine.

A blanket ban on all music on the beach doesn't actually enable us to find the socially optimal levels in the same way as a blanket allowance of music on the beach. In the airport example, a blanket ban or allowance would prevent innovations in things like sound protective walls to internalize some (though never all) of the externality.

[1] https://www.law.uchicago.edu/files/file/coase-problem.pdf

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PakG1Nov 2020

I would say yes. Ronald Coase did some excellent work to explain how transaction costs get in the way of optimizing economic activity among and within firms. Traditional marketplaces would clearly have higher transaction costs than these newer marketplaces. Search costs are much higher, coordination costs are much higher, and data analysis is much harder. Tech has a huge advantage in making all three of these things much lower and thereby making transaction costs much lower. Heck, just by not accepting cash, I bet they make transaction costs significantly lower than the traditional marketplaces. Heck, just by not having to operate point-of-sale card swiping devices, I bet they significantly lower the transaction costs too.

He won a Nobel Prize if that matters. I think his two seminal works, “The Nature of the Firm” and “The Problem of Social Cost” do really well to explain why tech is winning so much compared to traditional marketplaces. Especially “The Problem of Social Cost”, which explains how externalization of transaction costs creates advantageous and unfair effects.

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ryan_j_naughtonJul 2020

Helmets, mandatory exercise, and fasting are all things that improve the health of that single individual. In contrast smoking, vaccines, or masks are about externalities. We are more hesitant to regulate something an individual chooses to do if it only affects himself/herself. But the moment your actions have an effect upon me without my consent or a market transaction dictating it, then it is a market failure and a legitimate case for government intervention. Thus, the pointing a gun at people is an apt parallel.

As for your CDC PDF, is your point that there were 131,858 pneumonia deaths in 2014-2015 as a way to make it seem like the COVID-19 death count is in line with that? Because that is just ludicrous

There have been 133K deaths in the US out of 3.05M confirmed cases. Studies on the disease being asymptomatic have found it is asymptomatic around 20% of the time. This was from situations like the aircraft carrier where they tested everyone onboard or sports leagues. Thus, they were testing those entire populations. In both cases, those were some of the healthiest, fittest, youngest people compared to the broader population. Thus, there is no reason to think that they were underestimates of the level of asymptomaticness. But for the sake of demonstration, let's assume that we are undercounting the number of infections by 5X. Thus, there would be 15M people currently infected (as opposed to the 3M confirmed cases).

With that, the disease would have a fatality rate of 133K/15M, which is 0.89%.

While that might seem low, when you combine that with how insanely infectious this disease is (where any reasonable estimate would have this thing going through virtually the entire population without extreme social distancing). Thus, let's assume in a world without masks and social distancing we would have around 200M people infected.

That would be 1.78M deaths. That is more than the entire death count in your CDC pdf (1,769,940). Thus, more people would die from COVID-19 this year than all regular deaths combined. And this is with that 5X case count adjustment.

No offense, but you sound like a libertarian who never actually took the time to study economics in order to truly understand the nature of externalities. You are just mad are people infringing what you perceive to be your rights yet you are unwilling to acknowledge that you are infringing their rights through these negative externalities.

It would be worth reading Ronald Coase's "The Problem of Social Cost"[1] to perhaps refresh your knowledge of externalities. In it, he describes a situation (first described by Pigou) wherein a train catches a field on fire with sparks. He analyzes how if you force the train to not do this and side with the farmer, you are harming the train. While if you allow the train to do this, then you are harming the farmer. That is the nature of a negative externality -- inherently one person's perceived liberty/rights are infringed by another in either direction. But then if both rights are in conflict with one another, then surely they cannot both truly be rights for each cannot be maintained without the violation of the other. Thus, it is the role of the government to settle this by defining who has what rights.

[1] https://www.law.uchicago.edu/files/file/coase-problem.pdf

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schoenNov 2018

There's a long discussion in Coase's classic "The Problem of Social Cost" about the apportionment of liability between railroads and landowners adjacent to the railways when fires are started by sparks from trains.

http://home.cerge-ei.cz/ortmann/UpcesCourse/Coase%20-%20The%...

Basically Coase says that it's not necessarily the most economically efficient to blame the railroad that created the sparks, and that it depends on other factors (in the super-simple formulation that people sometimes attribute to Coase, this could include who could most cheaply act to mitigate the fires).

I think Coase would agree with you that we can't automatically assume that blaming PG&E and making PG&E pay for all the damages will lead to the most efficient outcomes for California as a whole in the future.

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dalbasalJul 2017

His original papers are as accessible as popular press. The big ones are “Nature of the Firm” and “The Problem of Social Cost.” For the 2nd one, Coase complained it is used to reach the opposite conclusion than he intended.^

http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0335.1937....

http://home.cerge-ei.cz/ortmann/UpcesCourse/Coase%20-%20The%...

^Essentially, Coase argues that in the absence of transaction costs, abcd. He meant this as a way of highlighting the importance of transaction costs, with abcd being obviously false in reality. Economists tend to assume efficient markets in their theory, so many read that statement to be boilerplate economist caveats.

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anigbrowlMay 2017

Capitalism operates on the basis of greed, not need. If a desired result can be accomplished at lower cost, it generally will be. Firms largely concern themselves only with first-order costs, leaving second-order costs to government, not least because the more abstract the nature of the cost, the fewer people are able to comprehend its existence.

If you're interested in this topic you may enjoy Ronald Coase's economic essay The Problem of Social Cost (which brought him a Nobel prize) and his body of work in general.

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