Tuesday, May 22, 2012

Coase and land markets

Here is Russ Roberts' splendid interview of Ronald Coase, who is a treasure at 101 years of age.  Many good people have lives that are much too short.  But Coase puts his longevity good fortune to good use.

Part of the discussion involves the Coase Theorem -- even Coase's qualms about the label and many popular interpretations.

Suffice it to say that market transactions can take place that undermine the argument for Pigouvian taxes or subsidies.

My favorite example involves land markets, especially as in proprietary communities.  But discussions of the Coase Theorem rarely see Coase as a land economist.

Should deaf people locate next to airports?  Will deaf people locate next to airports?

In the simplest ceteris paribus case, a potential negative externality becomes an effective nullity.  In fact, the owners of the adjacent land would see it in their interest to
recruit deaf renters.

In a more complex case, the deaf renters as well as the landlords see the possibility --but trade it off against their real world alternatives.  Would the deaf outbid the warehouses? 

Jim Moore and I once tried to write down all of the possible trade-offs. Bidders compete for sites and site owners compete for the attention of bidders.  The bidders evaluate and trade off (i) the natural characteristics of sites; and (ii) access costs to and from other sites with respect to other locators whose accessibility is valued; and (iii) the positive and negative externalities that might be available because of proximities at each site.  The math is simple.  Too simple.  We never saw all of this as Coasian.