in this instance, could be compelled to fence her property or be required to pay compensation for any crop damage. The reciprocal element of externalities creates opportunities to address these unintended consequences in ways other than governmental intervention, however. The farmers could work together to put up a fence to keep the cows out. If the cost of the fence was less than the cost of the damage from the cows, it might be worthwhile to the farmers to work together to put one up, especially if there were no existing rule that prevented the rancher from causing damage. The farmers could even pool their money to offer a certain amount to the rancher to persuade her not to buy another cow. For the farmers, again, this solution would be worthwhile if the amount of damage avoided would be greater than the cost they would have to pay. For the rancher, it would be worthwhile to take money in return for not getting another cow if the amount earned from the cow would be less than the amount the farmers offered. There might be a situation in which both parties are better off than either would be without that privately agreed solution.
Depending on your perspective, creating this type of solution might not appear “fair.” It may not seem reasonable that a farmer who is being harmed by someone else’s activity should have to be the one to take on the cost of preventing the problem. But what Coase is pointing out is that, in the absence of a political solution that regulates the rancher, the farmers still have some ability to improve their situation on their own. And, to the rancher, a newly created set of farms that affect her ranching operations also might not seem “fair.”
“Coasian” solutions to the problem – addressing externalities without government action – do have some conditions that need to be met before they are likely to happen. First, everyone needs to have full information about the costs and the benefits of the externality and any potential solutions to it. Second, any agreement that the parties reach needs to be enforceable; if the farmers pay the rancher not to get another cow and the rancher gets one anyway (and there’s no recourse), this type of solution will not be pursued in the future. Third, what Coase calls “transaction costs” – the difficulties and actual costs of pursuing the solution – need to be minimized.
Even if the conditions Coase outlines are not likely to be met in most cases of environmental externalities, there are some important implications of his argument. First, working to improve those conditions can be useful not only in their own right but because they can help communities be more willing to address environmental externalities on their own. Reducing transaction costs – perhaps by holding a neighborhood meeting and providing childcare – can make it easier for the sufferers of an externality to organize. Making information transparent is a good thing in its own right and can help the process of figuring out what the best solution collectively would be. Doing these things can also make communities less resistant to policy to address the externalities in the first place, because they better understand both the actual long-term costs and benefits of changing behavior and the underlying environmental problem.
Finally, implicit in the Coase Theorem is the idea that we don’t necessarily want to aim for a situation in which no externalities are produced at all. That sounds counterintuitive: if externalities are negative, wouldn’t we want them to be eliminated? But the activity that creates externalities frequently has value, and efforts to reduce the externalities produced will also reduce the amount of that activity. Electricity generation frequently causes environmental damage, but electricity is central to important endeavors. A manufacturing plant that produces pollution may be making life-saving medical equipment. Stopping electricity generation or manufacturing in order to prevent the externalities they create would not be a good solution. So even when regulations are created through a political process to manage the problem of externalities, it is likely that externalities will not be entirely eliminated. That is especially true because those who are responsible for creating the externalities will participate politically to minimize the harm they experience from any changes required to minimize the externality.
The excess cost from what people refer to as “internalizing externalities” (in other words, from making the producer of the externalities bear a cost from creating them) may be only in the short term. Over time, the cost of preventing externalities will likely decrease. Innovation can create new ways to accomplish the same goals at a lower cost, and that kind of innovation is likely to happen when many industries need to minimize the pollution they create because of new rules. The initial cost the industry or business may have to bear from regulation is real – and is the reason these actors may fight against regulation – but over time the costs may decrease.
Collective Action Problems
Another reason people don’t experience most of the effect of the externalities created by their activities is that environmental problems tend to be collective action problems. In other words, one person’s contribution to air pollution is shared by the community that experiences it. The individual polluter might feel the effects of some of the pollution, but most of the effects are felt by others.
Another aspect of what it means to be a collective action problem is that, in many cases, no one person is responsible for creating a problem; each of us contributes a little bit. Fisheries depletion happens because of global or regional fishing; one person’s consumption of fish, and even one vessel’s fishing, contributes only a small amount. Climate change comes from the actions of many people, all over the world; one person’s airline flight, car ride, or home heating forms an unimaginably tiny portion of the problem. This is part of what it means for environmental problems to be diffuse – caused and felt by many different actors – the implications of which are discussed further in chapter 4.
There are implications that follow from understanding environmental problems as collective action problems. Most important is that, for many environmental problems, addressing them requires a lot of entities to change what they are doing. Even if you individually are willing to change, others may not be, and, if they don’t change, your contribution will make little difference. If, in order to decrease the problem of plastic pollution, you decide not to take a disposable cup or bag, the environment will hardly notice. The same is true with a fisher who reduces her catch of fish; if others don’t do the same, the fish stock will not improve. (In fact, the fish she doesn’t take will be there for others to take.) This is one of the biggest arguments for policy solutions to environmental problems. If you need a lot of people to change behavior, you may need rules to ensure that they will.
An additional important element of collective action problems is that whatever benefit is created is shared collectively. If a group of people organize to stop air pollution from a local factory, everyone who breathes the air benefits, even if most of them did not participate in working for that outcome. (The same thing would be true of the people who continued to take plastic bags or cups when others refrained in an effort to decrease plastic waste, or a fisher who doesn’t decrease her fishing.) Those people who benefit without contributing are called “free-riders.”
It can make sense to be a free-rider. At the individual level, most of us have busy, complicated lives, and making change is hard. If you went to the grocery store without bringing your own bag, the only way to get your groceries home may be to take a disposable bag from the store. The same is true for putting in the organizing effort to make political change. If you don’t participate in the protest or lobbying effort in your community to decrease air pollution, and it succeeds, you benefit from the cleaner air as much as those who did give their time and energy to political organizing, and you also have the benefits of whatever else you did with your time or resources.
For businesses the logic is even clearer. Since it can be costly to internalize (or prevent) externalities, bearing that cost when you are not sure your competitors will do so is foolish. Until there is a regulation in place that requires everyone to make the change, being a free-rider on making environmentally beneficial change is likely to be good for business.
Ultimately the issue is that free-riders, or the possibility
