Difference between revisions of "Talk:Coase theorem"

Latest revision as of 04:20, August 16, 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 additional 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. Also, I would like to ask some concept questions on what the Coase theorem is or what it implies and what it is not. Specifically, I would like to ask:

"President Obama has articulated to the American people that a new program called cap and trade is a market-based way to combat pollution. Does the Coase theorem justify cap and trade? Why or why not?"

No. The Coase theorem only states that the efficient outcome will be reached regardless of initial property allocation (or legal entitement) when there are zero transaction costs and when there is strong rule of law. Necessarily of course, these legal obligations can exist only between private parties who are then able to negotiate and bargain freely and in full faith.

"Is the outcome generated after implementation of cap and trade optimal? Why or why not?"

No. The Coase theorem does not state that the government can arbitrarily set a quota and simply expect that that level would be the optimum level. Under cap and trade, there is no legal way for private parties to exceed the government quota. Under the assumptions of the Coase theorem the government never imposes a restriction on pursuing the optimal outcome, just potentially a legal entitlement only between private parties. For example, the cheapest method to deal with the negative effects of carbon emissions may be to plant trees (or it may even be determined there is only a negligible effect on overall welfare.) Under the assumptions of the Coase theorem, the polluter may be obligated to pay the specific injured party an arbitrary payment for each unit of pollution. However then, there exists an infinite number of ways for the private parties to bargain to achieve the optimal outcome, including even the injured party subsidizing the polluter to continue production so he can still receive payments. A cap, or quota, on emissions leaves private parties no legal recourse to explore these innovative methods of combatting pollution.

I would also like to ask on this specific problem:

"Do your results from the above problem imply that levying a progressive tax on a state or country can ever practically not inhibit efficiency? Why or why not?"

No. The Coase theorem only holds when there are zero bargaining costs and everybody is able to negotiate freely in perfect faith. In reality, however, if an unproductive class ended up with the best welfare outcome via legal entitelments and bargaining, members of the productive class would probably migrate to the unproductive class. Thus, the resulting outcome would not be Pareto efficient because the assumption that parties would be able to negotiate in perfect faith is obviously violated.

"What reason or reasons justify any apparent contradiction between the principles of a free market and the results from this problem?"

The Coase theorem only holds under conditions of a strong rule of law and zero bargaining costs. Currently, these assumptions rarely exist in reality for most economics problems. Moreover, the main motivation of the Coase theorem was to show that there is an economic efficient way to deal with unintentional wrongs not cured by law, not to deliberately pursue unjust legal entitlements just to test whether the Coase theorem will still produce the optimal outcome. Most of the time, it will not because the assumptions of the Coase theorem cannot be satisfied.

"What perhaps could be gleaned from the results of this problem?"

One observation could be that if there were a loving enviornment among Christians, where people could communicate freely and trust each other fully, a system of private charity could flourish where individuals would still be efficient.

"Using the concepts you have learned solving this problem, why would a communal society in Acts work efficiently but installing a Communist system not work out?"

"What are the implications of the result of this problem in determining whether private charity or public assistance is better? Is there a situation where private charity be implemented while maintaining efficiency? What about public assistance?"

Hopefully, my clarification helps. Let me know what you think of these additional problems and if you have any questions. I'm pretty sure that any serious student of Conservapedia will get the correct answer on most, if not all, of the follow up conceptual questions, though the rationale required may require critical thinking. Brown25 18:52, 15 August 2009 (EDT)

I provided some answers for the conceptual questions. Brown25 00:20, 16 August 2009 (EDT)