Tuesday, December 04, 2007

A practical example of the Coase Theorem

The Coase Theorem is the idea that a legal system would be unnecessary for the regulation of externalities in a world without transaction costs. A classic example is a train line that produces sparks that set off fires and destroy farmers' crops. If the damage to the farmer is worth more than the economic benefits to the train company the farmers will pay the train company not to run their trains. A rather odd example, from the very early days of this blog, is my consumption of Subway sandwiches.

Sweden has provided another example, via The Croydonian:

"A municipality in eastern Sweden paid a biker gang 200,000 kronor to move away from the region."


The national government could have intervened and used state power to get rid of the biker gang but it wasn't necessary. The socially optimal (presuming that the municipalities leaders are properly representing their constituents) solution won out without outside legal intervention. The bikers didn't want to stay more than the locals wanted them gone. The locals made it worth their while to leave.

4 comments:

LeCrapaud said...

"It is always a temptation to an armed and agile nation,
To call upon a neighbour and to say:
“We invaded you last night – we are quite prepared to fight,
Unless you pay us cash to go away ..."

Edmund said...

hmm not sure about this- this is a governmetn subsidy after all isn't it- so it depends on a legal system and governmetnal powers- it no more shows the unnecessity of government intervention than corn subsidies.

and what kind of country does this happen ( i presume they were unpopular becauwe they were engaging in illegal actitiy) ? perhpas we should rename danegeld........i wrote this and then saw lecrapaud's comment!

Anonymous said...

And I always though extortion was a bad thing.

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