Chronic Murmuring

I suppose there's nothing so discredited that you can't get a gvt grant for it.

I'm not entirely convinced about Cheung's debunking. First, public goods need to be non-excludable. Yet orchard owners obviously provide permission for only some bee keepers to locate in their orchards (hence, the advertisements in yellow pages that Cheung invokes). If bees are even relatively excludable, then the premises of a public goods model are not met, and the example does not serve as a counterexample.

Secondly, the theory of public goods does not say that a public good won't be provided, it only predicts that it will be underprovided relative to the efficient level of production.

I think James Meade originally proposed "The Fable of the Bees”. It has often been used to criticize the Coase Theorem. In David Friedman’s excellent description of the Coase Theorem he includes this section:

----------------- Begin D. Friedman -----------

Coase, Meade, and Bees

Ever since Coase published "The Problem of Social Cost," economists unconvinced by his analysis have argued that the Coase Theorem is merely a theoretical curiosity, of little or no practical importance in a world where transaction costs are rarely zero. One famous example was in an article by James Meade (who later received a Nobel prize for his work on the economics of international trade).

Meade offered, as an example of the sort of externality problem for which Coase's approach offered no practical solution, the externalities associated with honey bees. Bees graze on the flowers of various crops, so a farmer who grows crops that produce nectar benefits the beekeepers in the area. The farmer receives none of the benefit himself, so he has an inefficiently low incentive to grow such crops. Since bees cannot be convinced to respect property rights or keep contracts, there is, Meade argued, no practical way to apply Coase's approach. We must either subsidize farmers who grow nectar rich crops (a negative Pigouvian tax) or accept inefficiency in the joint production of crops and honey.

It turned out that Meade was wrong. In two later articles, supporters of Coase demonstrated that contracts between beekeepers and farmers had been common practice in the industry since early in this century. When the crops were producing nectar and did not need pollenization, beekeepers paid farmers for permission to put their hives in the farmers' fields. When the crops were producing little nectar but needed pollenization (which increases yields), farmers paid beekeepers. Bees may not respect property rights but they are, like people, lazy, and prefer to forage as close to the hive as possible.

The fact that a Coasian approach solves that particular externality problem does not imply that it will solve all such problems. But the observation that an economist as distinguished as Meade assumed Coase's approach was of no practical significance in a context where it was actually standard practice suggests that the range of problems to which the Coasian solution is relevant may be much greater than many would at first guess.
----------------- End D. Friedman -----------

To see the entire article go here: http://www.daviddfriedman.com/Academic/Coase_World.html

It really is an excellent discussion of an often mis-stated Theorem. The Coase Theorem is the thing that really turned me on to economics so it holds a special place in my heart.

Jim - right. I think that Cheung actually allowed for that in his original paper if I'm not mistaken. At least I think so - in this new JLE paper, they state that Cheung said he did not claim to have shown that externalities do not exist, or even that they did not exist in this market, but that economists hadn't fully understood the institutions that arose to help correct for these deviations from efficiency - such as through contracting. Same story for Coase's lighthouse study. It's not that there still do not exist externalities even in that market, but historically, this classic public good had been provided privately by the market, and that the market had been mature. If subsidies are still necessary, then arguably, they need to be more designed to reflect the actual institutional development of the market, which I think you would probably agree is more nuanced and complex than the simple public good problem allows for, right?

Robi - it was Meade. I forgot to finish that paragraph, as I was in a hurry to get to the link. Thanks for pointing that out.

Scott,

I don't think I disagree. My only point is that the argument that actual outcomes are more complex than the clean assumptions of the classic theory of public goods isn't falsification of the theory itself. The predictions of the basic models are still absolutely correct, it's just that "reality" (now THERE's a special case) isn't as simple as the models. Which is what I took you to have posted above.

Also, by the bye, I think Cowan and Tabbarouk post lots of interesting info on their blog. Don't let me kid you out of linking their stuff. It's just that they're both "True Believers." Reality HAS to fit their models. If it doesn't, there's something wrong with reality.

I don't think that they stoop to cook the facts, it's just that I take their analysis with a grain of salt.

Snow, our micro professor, really hammered us on that same point. There's no way, theoretically, around the public good problem. But, it seems like the neoclassical theory brings you up to public goods, and then stops short of actually talking about how in reality these problems can be handled in ways that at least approach efficiency (even if stopping short). I'm not at all opposed to subsidizing areas or taxing areas where these kinds of externalities exist (like pollutants). That is, in principle I'm not opposed. I tell my kids (for my macro class) that one argument for universal education is because of the externalities generated by education. The investment in human capital is a principal driver of growth, etc., but is underprovided if each family only chooses education based on their own costs and benefits. This is partly the trap that developing countries find themselves in - they cannot afford to send their chidlren to school, because they need their children's wages for subsistence, yet living standards will continue to stagnate so long as the population is uneducated. So, subsidies paid directly to parents in exchange for sendnig their kids to school can help balance it out.

Still, even there, I am not sure I believe the entire publid good justification for education (not that you proposed it, either; I'm just noting it). I recognize that there are deviations from the production possiblities curve due to externalities in education, but that does not then mean that the solution is to "subsidize education." Knowing what to do, if anything, to make education more efficient requires particular knowledge of that industry, not merely an understanding of "market failure." That's all I mean.

Scott Cunningham writes:

"I tell my kids (for my macro class) that one argument for universal education is because of the externalities generated by education. The investment in human capital is a principal driver of growth, etc., but is underprovided if each family only chooses education based on their own costs and benefits."

There may well be externalities associated with schooling, but I don't think you have identified one. How is the situation you describe any different from an ordinary capital market? Does your argument imply that all firms should have their investment subsidized because that drives economic growth?

Or in other words, I suspect you are confusing marginal with average.

You could improve the argument by noting the existence of income taxes, which imply that some of the return to investment in my children's education goes to the government rather than to me. But the same argument again applies to all income producing activities--it is simply the usual deadweight cost of taxation. If you collect taxes in order to subsidize schooling, you are reducing the malincentive on one margin (investment in human capital) but increasing it on all other margins.

It is also worth noting, in this case as in others, that people who want to argue for a subsidy (tax) tend to consider only positive (negative) externalities, instead of looking for externalities of both signs and summing them. In the case of schooling, for instance, you might want to consider Robert Frank's argument that relative income--more generally, relative status--plays an important role in the utility function. If so, when I send my son to Harvard, I am lowering the utility of my neighbor's son who only goes to Podunk U.--a negative externality.

Finally, it's worth noting that if there is a net positive externality to schooling, the standard Pigouvian solution would be some sort of percentage subsidy to it--for every two dollars the parents pay, the state pays (say) one dollar.
Our present system consists of the state spending $x per pupil on producing schooling and telling parents they can have that level of schooling for free--but if they want any other level, they have to pay the whole sum themselves. I leave it as an exercise for the reader to demonstrate that the incentives provided by that system to parents could result in lower per student expenditure than an entirely private system with no subsidy. That's in addition to the usual problems of government provision and the implicit assumption that the optimal level of schooling expenditure is identical for everyone in the state.

Dr. Friedman - thank you for the critical input. When I make mention of the potential positive externalities of education to my students, I don't go into much detail (read: no detail). I had described one of the principal drivers of average labor productivity as being human capital, and told them that this was probably why most industrialized countries offer universal-access, publicly funded, K-12 education. I haven't really bothered to go into any detail, but I probably should. Thanks for this input. I'm reading it over now.