Difference between revisions of "Talk:Coase theorem"

Revision as of 22:20, August 15, 2009

Andy, I was mistaken in stating that the Coase theorem is an appropriate justification for cap and trade, because it is not. The Coase theorem would not interfere with the level of production, just the initial allocation of property. Thus, I'll correct my edits. Your paragraph on excuses is fine. What I will do is maybe expound on some of the things you've written, so that readers can know precisely what the Coase theorem states and what it does not state. Namely, the Coase theorem does not state that there is an interference in the level of production either through a quota or through taxes. The Coase theorem only states that invariance occurs regardless of the initial allocation. FYI, half of Google's sources on the Coase theorem get it wrong. Brown25 00:35, 13 August 2009 (EDT)

I think, though I'm not certain, there is an interesting extension of the Coase theorem. Even if you had a tax on productive behavior from a productive class which was then transfered to an unproductive class and even if flow of these taxes could change direction and were varying based upon arbitrary conditions, so long as the classes are discrete and unchanging in their compositions, the invariance property of the efficient outcome from the Coase theorem would still hold, given the assumptions used in the Coase theorem. Amazing, though I'm not implying I would ever endorse such a policy, namely because such circumstances would never exist in the real world, it rewards laziness and lack of prudence, and even a minor misunderstanding of this line of thinking could lead to frankly Communistic policies. Thus, I want to be and will be very careful in how I approach this in the mainspace. Brown25 22:06, 13 August 2009 (EDT)

There is still much to be gleaned from the Coase theorem and I look forward to discussing and developing it further with you. That said, I think taxes are a form of transaction costs and thus do interfere with an efficient level of activity. If an owner of a railroad is taxed nearly 100%, then he will run the railroad less than if he's taxed at a reasonable rate, or at no rate. Everyone is worse off then.--Andy Schlafly 22:46, 13 August 2009 (EDT)

Your statement is absolutely correct. I was thinking about a situation, so hypothetical, that it would never occur in the real world. My assumptions for this problem that I was playing around with last night are as follows:

1. There are two people in this society only.

2. Each person has 100 units of value currently.

3. One person is called Hard Worker. If Hard Worker works he can earn 20 units of value. After each successive day, this potential drops by 1 unit of value. He would give 2 units of value to have the day off (leisure).

4. The second person is called Lazy Man. If Lazy Man works he can earn 10 units of value. After each successive day, this potential drops by 0.5 units of value. He would give 8 units of value to have the day off (leisure).

5. There is a a code in this society that requires an 80% tax on gross earnings. The tax receipts are then redistributed equally among the persons.

6. Gifts can be exchanged among members and agreements made, but are also taxed at 80%.

7. Hard Worker and Lazy Man can communicate and negotiate freely.

The question is, under these circumstances, what will be the equilibrium level of output, in days worked, for Hard Worker and Lazy Man? What will be the final wealth of Hard Worker and Lazy Man? What will be the equilibrium level of output, if there was no redistribution of earnings? What will the final wealth then be of the two persons? Now presume that Lazy Man is no longer lazy. He now only values leisure at 1 unit of value. Solve this problem under both the conditions of redistribution of wealth and no redistribution of wealth.

I will post the answers I got for this problem tonight hopefully. Brown25 16:23, 14 August 2009 (EDT)

You present a fascinating problem. I may try to use it as one or more exercises in my upcoming Economics Lectures, unless you object. I'll try to solve it today before you post your answer.--Andy Schlafly 17:40, 14 August 2009 (EDT)

Each person works until they can afford leisure, and when the value of the leisure is as much as the after-tax gains from the work. For the Hard Worker, that means he works ten days and then stops (due to the high rate of taxation). For the Lazy Worker, that means he works until he earns 8 units to pay for leisure. At the start he makes 2 units per day after taxes, but that drops and some math is required to calculate how many days more than 4 that he must work to earn 8 units pay for leisure. (It is not entirely clear from the question that the leisure actually costs the workers money.)

It gets more complicated as the workers burn through their savings with leisure, however, particularly with their unrealistically declining earning power.--Andy Schlafly 21:11, 14 August 2009 (EDT)

Sorry, I intended to mean that the value of leisure is an opportunity cost. That is if I could, I would give 8 units of value to have the day off, maybe amble around the town square, play a theology professor on Wikipedia etc. Of course, time is a perishable item that can never come back. Of course, if I could now buy something I am willing to spend more than 8 units of value, let's say in this hypotetical society a scooter costs 10 units of value, I would rather have that than the day off. I used rapidly declining earnings simply for simplicity's sake. Of course, I could in writing this problem denote my costs for work and my revenue that I will earn. Entepreneurs usually have to deal with declining marginal revenue on a much more apparent basis than laborers who are paid a constant rate until their marginal profit produced equals their wage. The concepts that I used to solve this problem, aside from the Coase theorem itself, were Nash equilibrium, game theory, and Pareto efficiency.

I have no objection to this problem being used in the economics course. The main thing that I think would be prudent is if you could peer review this problem and ensure that both the question is sound and understandable for your audience of high school students and the solution is correctly solved before the semester starts. I have solved out the problem, but I will hold off on posting it for a little bit so you can take into account my clarification. Specifically, leisure is a non-monetary commodity that cannot be bought, but has a value to each person. There is no requirement or opportunity to purchase leisure time. I can also create some Coase theorem problems that present a scenario of pollution caused to a third party with a fourth party perhaps existing who can mitigate the pollution most efficiently. Hopefully, all of this helps. Let me know if you have any questions. Brown25 18:20, 15 August 2009 (EDT)