Thoughts on economics and liberty

A debate with Harold Demsetz on second-hand smoke

I sent an email to Harold Demsetz about my blog post yesterday, and he kindly replied, with a brief analysis of the second-hand smoke issue I had raised. Let me take this analysis further here, noting that this is preliminary analysis, subject to revision as I find time to think about it. 

The issue

(very slightly edited – for typographical issues – from the version posted in my earlier blog post)

"Take the example of second hand smoke that causes lung cancer. The venue in this case is private, and the guest pays the appropriate market price for entry, but the potential harm caused to the bartender (lung cancer) is simply too large and disproportionate. 

"Here, one can identify all buyers and sellers over a long period, and everyone involved knows the precise likelihood of harm, but no one knows which individual causes a particular secondary harm. Allocating property rights perfectly doesn't solve this problem (or at least the markets have never figured out a solution by themselves).

"In my view such a situation needs to be brought under some umbrella of justice, and that is where a government can enter, by imposing a ban on such risky behaviour even where property rights are fully allocated. I've elaborated on this in The Discovery of Freedom."

Harold Demsetz's response:

EXTRACT:

Sanjeev:  I appreciate much the thought and the advertising you have given to my latest paper.  I will need to think over your bartender case, but my first reaction is that if the courts or legislature have given people the right to smoke it is up to the bartender to pay smokers to desist. Now, you might say that there will be a long line of people before him puffing cigarettes, waiting to be bought out. True, but, then, has this not become a strategic, free rider problem, one that can be solved by ownership of the slot of space at the bar by the bartender or by having the bartender pay his boss to make the bar no-smoking?  — Harold

My response:

I'm happy to assume, along with Demsetz, that people have a legal right to smoke. But I note at least three difficult issues:

1. The challenge of defining property rights in air

As I pointed out earlier, "the markets have never figured out a (property-rights based) solution" to this kind of a matter. Who owns which air particle in the bar? In my view it is not sufficient to create property rights in air behind the bar's counter, for smoke-filled air spreads everywhere. The bartender also moves across other's "air space". 

2. The smokers will not pay

Assume for a moment that a method to assign property rights in air has been discovered and implemented. One thing is clear. Smokers, who have a legislated right to smoke won't pay the bartender. But even property rights in air to someone (say, to the bartender) won't make them pay the bartender. That is because smokers can escape liability entirely. They know that the harm they individually cause is too small and too difficult to attribute to them. No court of law can penalise them. This, along with their legal right to smoke, means one thing at least: that they will never pay the bartender for the right to smoke.

3. The bartender will not buy out smokers

In this case the bartender can (theoretically) pay. But as Demsetz notes, a queue will quickly form. More problematically, all types of smokers and non-smokers will join the queue, pretending to be heavy smokers. That is only the beginning of the bartender's problems. The marginal price the bartender will have to pay will be determined by the true addicts who (presumably!) won't give up a smoke for any amount of money. And if I, a non-smoker, know that behind me in the queue is standing a true addict who will surely demand $10 million to not smoke, then I too will demand $10 million. The bartender will be a fool to even try to pay smokers. I can't readily prove it mathematically without more thinking, but my guess is that the bartender's optimal strategy, even assuming he can devise a way to prevent cheating, is to NOT buy out the smokers.

In summary: a) property rights can't be readily defined in this case and b) trade in this 'property' (air quality) will fail in the absence of identifiable responsible person/s who can be held to account for pollution. As a result, the bartender's likelihood of death from lung cancer will remain unchanged.

The economic solution does not work.

The key issue of harm; and justice

I raised other issue of justice in my blog post. I believe this is a crucial consideration. The principle of negative liberty states that you are free to do what you wish, so long as your action (and in some cases, inaction) doesn't harm me. The consideration of harm is important. 

In DOF I have outlined three categories of harm. Economic harm (loss) figures very low in the list. Some economic harm is purely imaginary, as well (such as harm from price change arising from 'monopoly' or 'cartels'). But this particular example is not about economic harm. I (bartender) can't wash my lungs (like I can wash laundry dirtied by factory smoke). I am dealing with deadly smoke. The potential cost is infinite: death. That is too big a cost to bear – for no fault of mine

I also know that there is a specific causal action in this case (smoking in confined premises), but I know that no one can be penalised. On such a matter of life and death, where economic solutions will fail, coercive regulation comes to mind. 

How does this fit into Demsetz's paper? I don't know for  sure. Happy to receive input from you.

ADDENDUM: Now please read Prof. Demsetz's response here.

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12 thoughts on “A debate with Harold Demsetz on second-hand smoke
  1. Surya

    Dear Sanjeev,
    The debate is interesting. I am inclined to agree with you, since I believe that justice is a concept that is outside the realm of markets. I haven't read Demsetz's paper yet though.
    But I am commenting here just to record something that I've been thinking about lately.  When you can engage in such a thought provoking and meaningful debate, don't you find it frustrating having to debate issues like cow slaughtering endlessly. And I am not addressing this question at you alone. More generally I am just wondering if debates have more costs than benefits, particularly if the other side has entered the debate for the sake of 'winning' it and not with the aim of learning something. 
    Even more generally, since liberalism is ultimately about learning to live and let live, shouldn't liberals just get along with their lives without bothering a lot about things they have no control over?
    Having said that, I do understand the reason for your persistence. When you see a problem and have a solution at hand, you can't stay doing nothing. I respect that spirit, and wish that you would see the society that you want to see within your lifetime.
    Regards,
    Surya

     
  2. Surya

    Dear Sanjeev,
    The debate is interesting. I am inclined to agree with you, since I believe that justice is a concept that is outside the realm of markets. I haven't read Demsetz's paper yet though.
    But I am commenting here just to record something that I've been thinking about lately.  When you can engage in such a thought provoking and meaningful debate, don't you find it frustrating having to debate issues like cow slaughtering endlessly. And I am not addressing this question at you alone. More generally I am just wondering if debates have more costs than benefits, particularly if the other side has entered the debate for the sake of 'winning' it and not with the aim of learning something. 
    Even more generally, since liberalism is ultimately about learning to live and let live, shouldn't liberals just get along with their lives without bothering a lot about things they have no control over?
    Having said that, I do understand the reason for your persistence. When you see a problem and have a solution at hand, you can't stay doing nothing. I respect that spirit, and wish that you would see the society that you want to see within your lifetime.
    Regards,
    Surya

     
  3. Sanjeev Sabhlok

    Dear Surya

    Do read Demsetz’s paper. You can download from the journal website by providing your personal details.

    To me if a liberal does not engage to reform his society he is NOT a liberal, but a theoretician. A liberal MUST NECESSARILY engage with the society, for he knows that the risks of not doing so are that the society will get influenced by socialists and fanatics of various types, including religious. India is a classic example where there have been virtually no liberals since Rajaji and Masani. In a country of 1 billion we need 1 lakh active liberals. Then the country will live and prosper. And I too.

    The personal cost benefit is simple. By providing leadership and guidance to India, I gain as well (psychologically).

    I encourage you to debate but NOT just debate: offer your leadership.

    Regards
    Sanjeev

     
  4. Sanjeev Sabhlok

    Dear Surya

    Do read Demsetz’s paper. You can download from the journal website by providing your personal details.

    To me if a liberal does not engage to reform his society he is NOT a liberal, but a theoretician. A liberal MUST NECESSARILY engage with the society, for he knows that the risks of not doing so are that the society will get influenced by socialists and fanatics of various types, including religious. India is a classic example where there have been virtually no liberals since Rajaji and Masani. In a country of 1 billion we need 1 lakh active liberals. Then the country will live and prosper. And I too.

    The personal cost benefit is simple. By providing leadership and guidance to India, I gain as well (psychologically).

    I encourage you to debate but NOT just debate: offer your leadership.

    Regards
    Sanjeev

     
  5. Brent Wheeler

    Thanks you for debate on the Coase theorem and the latest contribution from Prof Demsetz….. it takes a good deal of courage to take these two on!!! Perhaps what we can do is make sure we understand the argument.

    One point which is important is to consider total cost. I notice a market response in my country is for bars to ban smoking inside entirely. This is a property right they can and do control – what is done on their premises.

    They therefore would seem ready to forego the income from smokers and presumably attract such revenue as is to be had from the non smoker. They face good incentives to get this decision right and an efficient result emerges.

    I think the lesson is that we must think quite widely about where the relevant property right lies.

    Good luck
    Brent

     
  6. Brent Wheeler

    Thanks you for debate on the Coase theorem and the latest contribution from Prof Demsetz….. it takes a good deal of courage to take these two on!!! Perhaps what we can do is make sure we understand the argument.

    One point which is important is to consider total cost. I notice a market response in my country is for bars to ban smoking inside entirely. This is a property right they can and do control – what is done on their premises.

    They therefore would seem ready to forego the income from smokers and presumably attract such revenue as is to be had from the non smoker. They face good incentives to get this decision right and an efficient result emerges.

    I think the lesson is that we must think quite widely about where the relevant property right lies.

    Good luck
    Brent

     
  7. Sanjeev Sabhlok

    Dear Brent

    Which country are you referring to? I'd like to write about in my book.

    I always believe that self-regulation is the best form of regulation and if bars prohibit smoking voluntarily then we have an ideal solution.

    I suspect, though, that what is driving them to this behaviour is not their concern for bartenders, but concern that the justice system will force them to give lung-cancer affected bartenders very significant compensation. Insurance companies might have found it too high a risk to take, to insure the bars. Therefore the optimal solution for all the bars was to prohibit smoking. And if all of them prohibit smoking, then the loss is very small, really, for everyone (only the true addicts are lost to the 'bar system').

    If my hypothesis is correct, this seemingly non-regulatory solution has not been motivated by assigning property rights to air, but by a powerful justice system.

    In my view, the entire discipline of economics must be seen as a subset of the justice system.

    Regards

    Sanjeev

     
  8. Sanjeev Sabhlok

    Dear Brent

    Which country are you referring to? I'd like to write about in my book.

    I always believe that self-regulation is the best form of regulation and if bars prohibit smoking voluntarily then we have an ideal solution.

    I suspect, though, that what is driving them to this behaviour is not their concern for bartenders, but concern that the justice system will force them to give lung-cancer affected bartenders very significant compensation. Insurance companies might have found it too high a risk to take, to insure the bars. Therefore the optimal solution for all the bars was to prohibit smoking. And if all of them prohibit smoking, then the loss is very small, really, for everyone (only the true addicts are lost to the 'bar system').

    If my hypothesis is correct, this seemingly non-regulatory solution has not been motivated by assigning property rights to air, but by a powerful justice system.

    In my view, the entire discipline of economics must be seen as a subset of the justice system.

    Regards

    Sanjeev

     
  9. Brent Wheeler

    Greetings Sanjeev

    The country is New Zealand and – here as elsewhere, there being no absence of persons whose utility appears to maximised when regulations are passed – the total ban on tobacco smoking in bars arose through legislation.

    Some of the consequences have been interesting however. Far from meekly accepting the resulting loss in revenue – even though the ban necessarily drove down revenues for all – bar owners have responded by providing areas outdoor for smoking, investing in (new) balconies and areas for smokers and providing ashtrays etc often at considerable expense.

    So the issue seems to be, as economic reasioning would lead us to believe not an “all or nothing” response but rather “how much pollution” where the answer is most unlikely to be zero. Coase of course was prescient on this as well noting that it is the desire for both activities (in this case smoking and not smoking) to take place simultaneously which is the point of departure for the analysis.

    Prof Demsetz seems to be saying that in determining the costs which help drive the efficient level of pollution we need to be cogniscent of the costs of creating the property right. Where they are prohibitive, or exercising the rights they confer is prohibitive, then an efficient soluition (in this case no smoking and no allowance made for smokers) may well emerge and we should not be concerned about the apparent inefficiency of this.

    Finally, given that I am an economist it seems unlikely that I would submit to the proposition that economics is a subset of the law! I do not!! Instead I see inextricable interactions between behaviour occasionned by incentives and its modification by the influence of the law.

     
  10. Brent Wheeler

    Greetings Sanjeev

    The country is New Zealand and – here as elsewhere, there being no absence of persons whose utility appears to maximised when regulations are passed – the total ban on tobacco smoking in bars arose through legislation.

    Some of the consequences have been interesting however. Far from meekly accepting the resulting loss in revenue – even though the ban necessarily drove down revenues for all – bar owners have responded by providing areas outdoor for smoking, investing in (new) balconies and areas for smokers and providing ashtrays etc often at considerable expense.

    So the issue seems to be, as economic reasioning would lead us to believe not an “all or nothing” response but rather “how much pollution” where the answer is most unlikely to be zero. Coase of course was prescient on this as well noting that it is the desire for both activities (in this case smoking and not smoking) to take place simultaneously which is the point of departure for the analysis.

    Prof Demsetz seems to be saying that in determining the costs which help drive the efficient level of pollution we need to be cogniscent of the costs of creating the property right. Where they are prohibitive, or exercising the rights they confer is prohibitive, then an efficient soluition (in this case no smoking and no allowance made for smokers) may well emerge and we should not be concerned about the apparent inefficiency of this.

    Finally, given that I am an economist it seems unlikely that I would submit to the proposition that economics is a subset of the law! I do not!! Instead I see inextricable interactions between behaviour occasionned by incentives and its modification by the influence of the law.

     
  11. Sanjeev Sabhlok

    Thanks a lot, Brent, for your further comment. In the meanwhile we now have the detailed response from Demsetz himself, here: http://sabhlokcity.com/2011/03/response-from-harold-demsetz-to-the-questions-i-raised/

    I'm going to review his comments, your comments, and everything – afresh, from scratch – and then provide further thoughts on this matter. I propose to discuss further on the above blog post. When I do provide further thoughts, I'll try to remember to let you know.

    Regards

    Sanjeev

     
  12. Sanjeev Sabhlok

    Thanks a lot, Brent, for your further comment. In the meanwhile we now have the detailed response from Demsetz himself, here: http://sabhlokcity.com/2011/03/response-from-harold-demsetz-to-the-questions-i-raised/

    I'm going to review his comments, your comments, and everything – afresh, from scratch – and then provide further thoughts on this matter. I propose to discuss further on the above blog post. When I do provide further thoughts, I'll try to remember to let you know.

    Regards

    Sanjeev