Jan 10 2008
John Whitehead at Environmental Economics and I have something in common; we both struggle to clearly explain the Coase Theorem. This is a minor topic in AP and IB Economics courses, part of the Market Failure and Externalities units. Basically, the Coase Theorem presents individuals involved in a property rights dispute a market based mechanism for correcting the existence of an externality, as opposed to turning to the government or the legal system. Whitehead’s article linked here goes into a bit more depth than the typical principles text book, but clarifies some of the misconceptions and shortcomings of the basic theorem introduced in those texts.
In all likelihood, high school econ students will never need to know more than the basic version of the Coase Theorem, so this article is most useful for students (or teachers) who want to extend their understanding beyond the basic level. But while we’re on the topic, I thought I’d share my own method for illustrating Coase. This represents the basic version, but I think it illustrates the concept more clearly than the typical example from a text. I tell them a story, here it is:
When I was a kid we lived in this little yellow house outside of Minneapolis, where summers are brutally hot and humid. Our next door neighbor had a huge old oak tree in his yard with branches that spread out over our yard and provided us with shade for playing outside on hot summer days. One day, after a bad lightening storm, our neighbor became afraid that this huge oak tree might someday get struck by lightening and fall on his house, so he decided to cut it down.