Pigou vs Coase, as refereed by Demsetz

This is a good summary of the Pigou vs. Coase debate on externalities. I have one comment: That the author should have brought Hayek into the picture. After all, the piece was published in 1996. What follows is a kind of executive summary.

Demsetz sees the debate on externality as one between two ideals: An ideal state (with perfect information) and an ideal market (also with perfect information and zero transaction cost). Taken to the limit, both models do not generally produce identical solutions. It is well known that the initial distribution of wealth and income affects market outcomes. Change that distribution and the economy rests somewhere else. With Pigovian state intervention, one also needs to factor in the initial distribution of wealth and income as a determinant of political process. Still, it is reasonable to imagine that both models arrive at the same end-point if they started with the same initial conditions.

Demsetz then concludes, based only on theoretical considerations, that the choice between the two models is one determined by preferences for freedom and the final (and/or initial) distribution of incomes and wealth.

Once we depart from the ideal to actual governments and markets, the choice between the two solutions would then have to take into account how much information there is (available) in the competing models, and how well they would reduce transaction cost. Here, Hayek would pronounce in favor of Coase, if only because Hayek believes that the market is more capable of ‘discovering’ such phenomena as efficient technologies and consumer preferences. Transaction cost can be seen as another form of externality, so we start to run the risk of arriving at a proverbial slippery slope.

Nonetheless, Demsetz is essentially right. Transaction cost is not at the kernel of Coase; and neither did Pigou ignore transaction cost. What was being debated was who should have the property rights to the externality, a question that economists usually avoid but one that Coase faced head on.

Philippines vs China

WHY WE WON

It seems that we can boil down the legal conclusion of the arbitral ruling as based on only two key questions.

One, what is an island? A rock is not an island. So there. Even if China builds up a rock, it still cannot become an island. It may be a feeler island, but still that’s not an island in the legal contemplation of international law. UNCLOS says that artificial islands are not properly islands. (Otherwise, any oil rig can claim to be an island!)

And there’s the economics of islands. Under UNCLOS (Art. 121(3)), only natural formations that can sustain economic life on its own, can have maritime zones, such as an Exclusive Economic Zone (EEZ).

Two, what is an archipelagic state? It is one composed of many islands. PH is archipelagic. China is not. It appears that China conceded its status as a coastal (non-archipelagic) state when it signed the UNCLOS because the UNCLOS classifies countries in only two ways — archipelagic or coastal. The Tribunal ruling, in para. 573, categorically restates that China is a coastal state.

The answers to these two questions determine the EEZ, which is 200 miles from the coastline of a non-archipelagic state; and 200 miles from the archipelagic baseline of an archipelagic state. The baseline is a point-to-point boundary that encompasses or includes the islands of an archipelagic state.

An outlying island in the South China Sea, even if it could be claimed as territory of China, cannot result in an expanded EEZ based on archipelagic baselines because China is not an archipelagic state. (Consider the following related question: Can the US consider the waters between Hawaii and Los Angeles as “internal waters” using the archipelagic baseline approach? The answer is in the negative because, like China, the US is not an archipelago.)

The EEZ of an outlying island is 200 miles around that island because such an island is treated like any other land territory (Art. 121(2)). The EEZ cannot extend beyond the 200 miles (beyond this, there would be continental shelf (something else) or open international waters (high seas)). And an EEZ could be delimited if competing EEZ’s from other nearby states exist.

The ruling states that the disputed territories are not at all islands, and therefore cannot provide China an EEZ. Practically all the major disputed territories are inside the EEZ of the Philippines because it is an archipelagic state. Therefore, even ‘rocks’ can be useful to the Philippines, if they are located within the EEZ based on the archipelagic baselines of the Philippines. These useful rocks include Scarborough Shoal, Second Thomas Shoal, Johnson Reef, McKennan Reef, Hughes Reef, and Mischief Reef. Some of the disputed rocks are outsize the EEZ of the Philippines.

An important caveat is that territory and sovereignty are matters of international law not subject to the UNCLOS. Nonetheless, disputes relating to the EEZ are pointedly the subject of the UNCLOS.

WHY IT MATTERS

EEZ means maritime zones (not necessarily territory in the usual ‘conquest’ or ‘historic’ sense) that we can, under international law and UNCLOS, consider as usable only by us. We can, by negotiation, lease or allow others to use the EEZ, but the extent to which the Philippine Executive can do this is governed by the 1987 Constitution.

NB: The map of PH EEZ is from Wikipedia.

PH EEZ Screen Shot 2016-07-14 at 2.07.29 PM

 

12 Articles Every Aspiring Economist Should Read | Steven Horwitz

Here are 12 important articles to help you understand sound economics, ideally before you head off to grad school in economics.

Note: Coase, Hayek, McCloskey, Alchian, Buchanan, Friedman, Lucas

Source: 12 Articles Every Aspiring Economist Should Read | Steven Horwitz

Living the lousy life of a telecom consumer

Remedies against monopoly

You can almost see  the present system of announced prices, with unannounced promos maintained by the telecoms, as a form of price discrimination, a concept familiar to students of economics.

The two aren’t quite monopolies. But for the sake of discussion only, imagine that they are a two-piece cartel, a bikini in nosebleed-speak.

What can consumers do to foil a price-discriminating monopolist/cartel?

Any interesting answers out there?

Rene Saguisag vs. a Combine

In a letter to the editor of a broadsheet, Rene Saguisag asks a question about defining ‘one-man rule.’

It appears that Rene is a one-man law firm against an unnamed combine.

One wag said we ought to give the combine a name.  He suggested that it must be the firm of Hem, Haw, Posture, and Sneer.  When I asked if such existed, he said surely there is one in the good ol’ US of A called Hem, Haw, and Posture, if only because the dramatic arts are critical to success in jury trials.  He thought there was a one-man law firm somewhere else called Sneer.  Hence, the combine.

I thought about all this for a while.  An impeachment does look like a jury trial.  Wags sometimes win. But then, does sneering win cases? Perhaps apoplexy is an alternative?

Questions FIT to ask on the cost of electricity

Glen Campbell's song (photo credit freefoto.com)

Electricity is perhaps just another commodity.  An early legal case in Philippine jurisprudence established that it is a “thing” that could be taken, and therefore be the object of a crime (of theft).  But it is now more than just a thing.  It is too expensive, and as an object of business, it attracts “power” players (pun intended) more than usual. Lately, the drive to protect Mother Earth has caught on, and in its wake is a law, the Renewable Energy Act of 2008 that grants incentives for the use of renewal energy in the production of electricity.  Among the key elements of the new law is something called FIT.

How did FIT come into being?

Continue reading “Questions FIT to ask on the cost of electricity”

Ronald Coase on global warming

Railroads used to spark

Global warming is an issue that resurrects that old debate between Ronald Coase and A. C. Pigou.

Let me accept that carbon use induces global warming. I’m not so sure about this, but for discussion let’s take this as given.

Warming as externality

One way to look at the issue is to consider that warming, like pollution, is an externality.  Ronald Coase’s solution is to give property rights to the use of carbon (either to the one who likes it cold, or to the one who likes it hot).  Coase demonstrated that the efficient solution is the same regardless of who gets the property right, but of course the distribution of wealth differs.  If you give the right to the one who likes it hot, the one who wants it cold has to pay; and vice versa.

Continue reading “Ronald Coase on global warming”