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.


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

Why blogs should be censored

This is a particularly good example of the inanity of freedom of expression, never mind that of the author.

One, he doesn’t like Christians, and calls the Philippines ‘Christianabad.’ Such cheek.  The religious of either left or right should mount a holy war to expose the Get Real folks as insult artists.

Two, he believes that FB, corporations, and religions are all the same crude banana.  Maybe.  Maybe not. But so what? Has he ever run a behemoth, or tried to deal with satanic cults?

Three, his solution to the predicament of FB users who upload bikini pics is to update privacy settings.  Fat chance.  No one really understands the privacy features of FB, or any site for that matter. Fine print is an automatic non-read.  Still the only way to avoid exposure is simple: Wear a fig leaf or Just Say No.  But we don’t do the latter because there is a nonzero value to FB users even if they now can’t quite capture the financial benefits.

Four, he thinks lawyers will be called upon to disentangle difficult social issues.  And I thought the bard said we should kill the lawyers.  I don’t know the solution but turning to lawyers and reading stuff from Get Real will get a nonthinking nobody nowhere.

Enough of blather.  Bring in the censors.  The site should be called We’re Unreal.

Disclaimer:  My one regret, though an iffy one, is this post just might promote site traffic to Get Real Philippines.  But it would have been worth it if just one reader gets saved from eternal intellectual damnation.  Also, I side with the good sisters of STC on the original issue.

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”

Three symbolic economic changes to kickoff the Aquino Presidency

There are times when symbols matter more than substance, and times when symbols and substance coexist.  The latter times give a window of opportunity for the new Administration to set the tone for shifts in economic policy that make sense.

For consideration are three suggestions.  One is to roll back the EVAT rate from 12% to 10%.  Another is to negotiate a new “basic” text message rate of 10 centavos (compared with the by-now archaic P1 rate).  Still another is to empower parents and teachers of students in public schools to decide which textbooks the students will use.

Continue reading “Three symbolic economic changes to kickoff the Aquino Presidency”

Star wars log – The “great success” is seen differently by serious foreign observers

It is a mystery that the local media seem to have fallen all over themselves to praise the “success” of poll automation.

At least some foreign observers have a different take.  In part, they state:

The PCOS machines turned out to be overpriced lemons, agreed Carol Pagaduan-Araullo, chairperson of Bayan (New Patriotic Alliance) and convener of Pagbabago. “You don’t expect to see your newly-acquired expensive appliance to break down the moment you bring them home and start to use them,” said Araullo.

The PIOM documented the nationwide occurrence of breakdown of PCOS machines which can all be attributed to the Comelec’s and Smartmatic’s cost-cutting measures. In a a PIOM group’s interview with the Comelec director Emmanuel Ignacio in Tarlac, he admitted that 600 voters per machine are “more ideal” compared to 900 plus per machine. Ignacio told the PIOM only 1 modem per 3 precincts were allotted (and that explains why precincts were packed in the same schools). The PIOM group also learned that to further cut cost, the Smartmatic did not install cooling fans or cooling mechanisms in its PCOS machines, hence its proneness to break down from overheating.

Lemons? Overpriced?  Should we be happy we don’t own the machines? Should we start looking at the anti-graft laws on contracts that are “disadvantageous” to government?

It is often said that success breeds success.  Pretty soon we may hear some folks  proposing we should “buy” the machines, on the theory that we had a “successful” automation, and we should do it again.

And the would-be cheats would have a field day.  The next time they will know better how to convince potentially losing candidates that the former can, indeed, do some “magic.”  After all it will be the same machine, the same CF cards, and, likely, a renegade machine can be made available for “demonstration” purposes.

Star wars log: “Prayer is the answer”

At the very end of HALAL’s report on poll automation, it states: “Pray for the best. Prepare for the worst.”

Each man an astronaut with a line to Houston seems to be the implicit message.  And we should all look like Tom Hanks.

HALAL does not even directly address the one last safety measure – the random manual audit.  They do call for manual precinct count where there is some kind of obvious failure.

It is arguable that there is already an obvious failure in the absence of the machine-readable UV markings on the ballot, the opaque black ballot box, the “excess” voter registrants, the “excess” ballots and smart cards, and the inability of a voter to get an on-screen verification that his choices were indeed counted.

But it seems that Comelec officials fully trust the competence of Smartmatic,  and perhaps they have their proverbial heads in the sand.   Elections should be held at the beach.

It seems of no more use to ask how we got here or there.  But it is fair to ask the question on the test of negligence.  It is negligence if, on reasonable grounds, a mishap or harm would be expected by a prudent man to result from what a person does or does not do.   HALAL’s report leads to a fair conclusion that there has been negligence on the part of Comelec officials and Smartmatic.

But of course, a negligent party can get lucky.  Just because he drives at reckless speed and doesn’t wear a seat belt doesn’t mean he is liable.  The negligence still must cause harm.

And so we pray.