The Coase Theorem

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The Coase Theorem

• F.H. Buckley
• Sciences Po
• fbuckley_at_gmu.edu
• Goetz 31-35

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The Coase Theorem
The Problem of Social Cost, 3 J. Law Econ. 1
(1960)
Can you provide a statement of the theorem?
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Fontainebleau v. Forty-Five Twenty-Five
Atlantic Ocean
Beach
Fontainebleau addition
Fontainebleau Hotel
Eden Roc Hotel
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Check out the shade on the right
The shady Eden Roc Hotel, 4525 Collins Ave, Miami
The sunny Fontainebleau, 4141 Collins Ave., Miami
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How would you handle this?

• Did Eden Roc have a light easement
• Judgment at trial applied Justinians sic utere
  tuo ut alienum non laedas do not use your
  property in such a way as to injure another
• What did the appeal court hold?

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How would you handle this?

• Justinians sic utere tuo ut alienum non
  laedas do not use your property in such a way
  as to injure another
• What did the appeal court hold?
• Is that the end of the story?

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How would you handle this?

• Justinians sic utere tuo ut alienum non
  laedas do not use your property in such a way
  as to injure another
• What did the appeal court hold?
• Is that the end of the story?
• Suppose that Fontainebleau values the new
  building at 20M and Eden Roc values the sunlight
  at 30M. What result?

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Lets turn that around

• Suppose that Eden Roc had been able to obtain an
  injunction to stop the construction of the
  Fontainebleau addition.
• And suppose the value of the new building to
  Fontainbleau is 20M and the value of the
  sunlight to Eden Roc is 10M.
• What result?

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The moral of the story

• If you dont like the viewbuy the view.

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How would you formulate the Coase Theorem?
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How would you formulate the Coase Theorem?

• When there are no barriers to bargaining, the
  parties will exploit all profitable
  opportunities.
• They will then arrive at the same result whatever
  their legal rights might be.

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How would you formulate the Coase Theorem?

• When there are no barriers to bargaining, the
  parties will exploit all profitable
  opportunities.
• They will then arrive at the same result whatever
  their legal rights might be.
• A rule of legal irrelevancy.

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The Corollary to Coase

• Legal rules are not irrelevant, but may dictate
  results, where there are barriers to bargaining
• Barriers to bargaining as transaction costs.

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The Corollary to Coase

• Legal rules are not irrelevant, but may dictate
  results, where there are barriers to bargaing
• Barriers to bargaining as transaction costs.
• So what are examples of transaction costs?

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Transaction CostsN-person bargains and hold
outs
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Transaction Costs Emergencies
Rescue at sea
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Strategic Behavior Of bluffs and hard bargaining
Sucker Is this a game of chance?
W.C. Fields Not the way I play it
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Does any of that apply to the Eden Roc case?

• Lowest transaction costs occur where there are
  only two parties, where they are both businesses,
  where there is no time pressure to negotiate.
• But even then the presence of transaction costs
  argues for a legal regime that mimics the market

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An application Why is there war?
Shouldnt all wars be short-circuited by a peace
treaty?
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Why is there war A transaction cost analysis

• Insufficient time to bargain? Dr. Strangelove
• Information Costs? Iraq 2003?
• Hubris? The Confederacy?
• Agency Costs? Franco-Prussian War?
• Bluffing Occupation of the Saar 1935
• No bargaining space Hamas vs. Israel

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All we are saying, Is give contracts a chance
Pakistanis employing the defect strategy