fatvegan

I talking before about thinking Coase is kind of a dufus. And telling my lecturer about it. I went and chatted some more today. He thinks I'm at least a bit right. I'm not entirely sure.

This following bit may be considered mildly daggy by some folk.

It starts to get a little complicated. You've got two player models and n-player models. I think Coase breaks for n-player models, in much the same way that collusion breaks when there are no barriers to entry. Regardless, unless there are property rights protecting the party with the most to lose, then the party with the least to lose will have a negotiating advantage. In the short-term "creators" will be bled dry; in the long term no one will produce anything dependent on "rights" obtained through Coasey sorts of negotiations. Coase doesn't seem to explicitly look at the long term, but if there is no long term, then even if your short-term is "efficient", it's not that interesting.

I'm still confused about the impact various types of rights have on the system. There are binary property rights (e.g. a right to total silence), and continuous property rights (e.g. pollution levels). Rights involving omission (e.g. the right to the absence of something) versus rights involving commission (e.g. the right to the presence of something). They all seem to affect the outcome. If it's possible to translate Coase to an n-player model, then I think the equilibrium will be stable at an inefficient point. My lecturer seems to think so too.

The purely competitive market models strike me as a bit broken. I was thinking about collusion. With perfect information, then I'm starting to wonder if collusion maybe would thrive. Success at collusion in markets with low barriers to entry mean success at price wars. Which in turn is mostly about cash reserves. If that's the case and each business knows how large the reserves of other businesses are, then maybe that can accurately predict who would win a price war. So they could conceivably do away with price wars altogether - whoever is the most likely to win will simply take over the monopoly and the smaller business will move on. All of that price-cutting that might have benefited consumers, at least for a short period, will now all end up as profit. The problem with this is, no one really knows how things would work in perfect competition. But that's not particulary related to the Coase stuff.

I started drawing some diagrams. But they confused me more.

If you have a situation. One smog factory and 1000 fisheries on a lake. The smog factory is only just staying in business, and the fisheries are thriving. They pretty much leave each other alone. But one day the smog factory decides to diversify into water pollution. It doesn't stand to make much money from it (a few thousand dollars), but if it starts with it's new business plan, then all the fisheries will go out of business. That's millions of dollars in revenue lost. According to Coase the fisheries would go to the smog factory owner and say "Hey, if we pay you what you would make from your new water pollution business, if you promise to not start the business, you can make your money, and we can all stay in business." According to Coase, the smog factory owner says "Yes, absolutely. That sounds like a great deal." But I suspect that assuming there are no property rights whatsoever (which we are), the smog factory owner would say "Nope. If you don't give me $x of your profits, I'm going to start my new water pollution business." The smog factory owner has looked at his graphs and has worked out that $x is the exact point where some of the fisheries have gone out of business (all the ones who can't afford $x), but overall he makes the most money. If those fisheries that can afford the $x want to stay in business, then they will pay. Even if he's a bad negotiator and accepts some amount less than $x, any amount he obtains which is greater than the few thousand dollars the water pollution business would have earned, will result in some market distortion. So you have a very happy smog factory owner who sits in his factory all day and gets paid huge amounts for doing nothing at all to the water. You get a lot fewer fisheries, but still some who are making a profit. And you get consumers who are paying a lot more for their fish than they originally were, and are getting a lot less of it. Which is exactly what Coase says won't happen.

I'm not sure what happens if there is only one fishery. The smog factory owner could conceivably take 100% of the fisheries profits. Since he has total control over the fishery's viability. Yes. The fishery will be forced to pay 100% of its profits. Any fishery owner that refuses will be replaced by a different owner that will. It's like the talented chef moving around until he finds someone willing to pay him all of the money that is earnt as a result of him working there. The smog factory owner, who doens't have talent but controls the profitability of the company, can move around by forcing fishery owners to close down and sell the business. Only someone who agrees to pay the smog factory owner all the profits will be able to guarantee that the smog factory owner won't close them down. Or the smog factory owner buys the fishery himself for $0 (because it has no value unless he agrees to not pollute). This won't result in market distortion, just virtual piracy. It's like an arbitrary flat dollar rate tax on a company. I wonder why governments don't do that. Probably because it's kind of immoral. But economists don't care about that.

Ooof. I feel all out of breath. Dear me. Economics is silly when it comes to this sort of bizzo. I like the sort that doesn't use models and strategies a lot more.