Thoughts on economics and liberty

In which Ronald Coase clarified that town planning zones can be justified – but in a very few cases

This is a very important section of Coase’s 1959 article, The Federal Communications Commission. [I had cited this here, earlier]

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The fact that actions might have harmful effects on others has been shown to be no obstacle to the introduction of property rights. But it was possible to reach this unequivocal result because the conflicts of interest were between individuals. When large numbers of people are involved, the argument for the institution of property rights is weakened and that for general regulations be¬comes stronger. The example commonly given by economists, again following Pigou, of a situation which calls for such regulation is that created by smoke pollution. Of course, if there were only one source of smoke and only one person were harmed, no new complication would be involved; it would not differ from the vibration case discussed earlier. But if many people are harmed and there are several sources of pollution, it is more difficult to reach a satisfactory solution through the market. When the transfer of rights has to come about as a result of market transactions carried out between large numbers of people or organizations acting jointly, the process of negotiation may be so difficult and time-consuming as to make such transfers a practical impossibility. Even the enforcement of rights through the courts may not be easy. It may be costly to discover who it is that is causing the trouble. And, when it is not in the interest of any single person or organization to bring suit, the problems involved in arranging joint actions represent a further obstacle. As a practical matter, the market may become too costly to operate.

In these circumstances it may be preferable to impose special regulations (whether embodied in a statute or brought about as a result of the rulings of an administrative agency). Such regulations state what people must or must not do. When this is done, the law directly determines the location of economic activities, methods of production, and so on. Thus the problem of smoke pollution may be dealt with by regulations which specify the kind of heating and power equipment which can be used in houses and factories or which confine manufacturing establishments to certain districts by zoning arrangements. The aim of such regulation should not, of course, be to eliminate smoke pollution but to bring about the optimum amount of smoke pollution. The gains from reducing it have to be matched with the loss in production due to the restrictions in choice of methods of production, etc. The conditions which make such regulation desirable do not change the nature of the problem. And, in principle, the solution to be sought is that which would have been achieved if the institution of private property and the pricing mechanism were working well. Of course, as the making of such special regulations is dependent on the political organization, the regulatory process will suffer from the disadvantages mentioned in the previous section. But this merely means that, before turning to special regulations, one should tolerate a worse functioning market than would otherwise be the case. It does not mean that there should be no such regulation. Nor should it be thought that, because some rights are determined by regulation, there cannot be others which can be modified by contract. That zoning and other regulations apply to houses does not mean that there should not be private property in houses. Businessmen usually find themselves both subject to regulation and possessed of rights which may be transferred or modified by contracts with others

KEYWORDS

Coase, town planning, zoning, spatial restrictions, separation of land use, industrial, residential, manufacturing

 

Sanjeev Sabhlok

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