“The Problem of Social Cost” by Ronald
Summary
Coase (1960) main focus in this article includes the reasons why some externalities are internalized (p.1-44). These externalities include rights, expenses, and reserve allocation. He utilizes Pigou’s method in finances to illustrate his ideas. That is, if factory contamination causes $50 in damage annually, then tax it $50 until the factory fixes it. Besides, if installing a scrubber costs $40, it implies that the company will fix one and end the taxation.
He points out that if X (the factory) hurts Y (the community), then forcing X to compensate Y permits Y to hurt X. He asserts that this approach is not socially proficient. Coase argues that it would be more efficient (but not impartial) for the entire system if it would cost $30 for the community to relocate. In this situation, he assumes that there are no transaction costs. However, he also focuses on transaction costs involved in settling the social costs and allocation of property rights.
Coase (1960) also brings out the issue of non-coercive solutions (p.1-44). He illustrates this by using a correlation between a rancher practicing the activity and a farmer. He argues that if humans existed in a domain that did not involve transaction costs, they would negotiate with others to yield maximum efficiency in the distribution of resources (Coase 1-44).
Analysis and conclusion
From the book, if Coase’s argument is to be considered in resolving social costs, then the aspect of rights has to be put into consideration. That is if the rights are allocated, and the transaction costs are missing, then the externalities need to be internalized. For example, side compensation appears in the aforementioned illustration. This requires the negotiation of the property rights considering that the transaction costs for doing so do not exist.
I agree with Coase on the importance of price in dealing with the externality cost. When transaction costs are involved in settling the social costs, the issue of property rights is bound to arise, with price eventually being a center of focus just like Coase suggests. I also agree with the view that the parties will have to look at the available options. In my view, one may opt to bargain without transaction costs.
One may use legal processes to assert the right. In concurring with Coase, one may choose to internalize through merging X and Y into one entity. Any rise in the transaction costs means that one party may find it difficult to internalize the externalities alone. A rise in the transaction costs implies that one must incline towards greater stages of centralization to effectively handle externalities.
I observe that Coase fails to appreciate the real-life situations where no bargains can be made without costs. In situations where many people are involved, coordination problems are bound to emerge. In the pollution example, it would be more efficient for the factory to take preventive measures than the people paying the factory to relocate.
Overview of the argument, conclusion, and reaction
Coase argues that actions taken in resolving such social costs should only be those whose gain is more than what is lost irrespective of the parties involved. In my view, this approach and decisions that alter the existing system may, in some situations, worsen the conditions for others. It is my view that it is imperative to be concerned about the overall effect of choosing a certain social arrangement.
“Discounting the Future: Economics and Ethics” by Brennan
Summary
Brennan (1995) argues that by implying that the present and future generations have equal claim to ecological benefits, it does not mean that different generations possess similar claims on current resources (p.3-6). He derives this from the fact that the overall level of prosperity and welfare may vary over time. The author advocates for a situation where the opportunity-cost rationale should be applied to determine whether or not activities conducted today will be beneficial to both the current or future generations as opposed to generalizing the perception that taxing or regulating some actions today will benefit the future generations.
He holds the position that even the current generation deserves the benefits accruing from the resources. However, if the current activities pose higher costs to the prosperity of future generations, policies should be enforced to ensure that there is a balance in the enjoyment of resources for both the current and future generations.
Analysis and conclusion
From Brennan’s argument, it is conclusive that the opportunity-cost approach expresses that the discount rate is the market rate interest. I concur with this since the discount rate is the value attached to a price in the future against the current cost of the same. In this regard, four factors that yield interest rates should be considered in evaluating the social costs given environmental preservation and discounting with the future generation in mind.
These include the level of financial activity, inflation, risk, and pure time preference. The author seems deeply concerned with the obligations of the current generation given the well-being of future generations. I concur that the implementation of policies should not purely be based on economic benefits only. This view is important as it indicates concerns for preserving resources for the benefit of future generations.
However, I argue that policies adopted should not adversely disadvantage the current generation. The outstanding differences between equal-standing and opportunity-cost discounting would not be relevant if rules that constantly appeared to be fine from one aspect emerged to be finest from the other aspect.
Overview of the argument, conclusion, and reaction
Brennan holds the position that provided the inadequacy of resources makes compromises between the current and future generations unavoidable, any consideration on the ecological policy aimed at benefitting the future generations should emphasize the economic opportunity-cost aspect. I concur that this will help put a balance between the costs incurred by the current generation and the prospective benefits to be gained by the future generations. Policies developed should reflect the devotion of the current generation to the wellbeing of future generations.
I infer that the current generation should make sacrifices since we expect future generations to be in a worse environmental condition than the current generation. Economic analysis should be continuously conducted to determine the level of sacrifices that should be made today. The sacrifices should only be made if the level of welfare of the future generation will be higher than what is lost today. These sacrifices may accrue from taxing the polluters more for emissions.
A range of discount rates such as zero and negative rates ought to be utilized contingent on the duration involved, the level of improbability, moral responsibilities, and the scope of policy under evaluation.
“An Economic Perspective on Environmental and Resource Management” by Wallace
Summary
Oates suggests that economics entails three elementary and significant messages for environmental protection (p. XV-XX). First, he states that an unrestricted market arrangement is bound to produce excessive pollution. In this regard, it is imperative to have legal interventions to prevent environmental degradation. Second, he draws the point that economics is critical in providing principles for ecological quality.
Third, he states that economics is crucial in designing policy tools to achieve the desired ecological standards. His key point is that economic analysis is fundamental in enabling people to understand the origins of ecological dilapidation and consequently in designing policies aimed at protecting and improving the environment.
Oates drives the point that any action that inflicts a cost on the community by utilizing any or some of the limited reserves must raise a price. The price must be equivalent to the social cost. In situations where there are ecologically destructive activities, there are un-priced costs such as pollution. In this case, lack of suitable price for rare reserves such as clean air and water results in their disproportionate use leading to ‘market failure.’
He points out that when rare reserves such as clean air and water are free of charge, they are certainly overused. He states that souks could function properly in controlling the manufacturing of commodities including reserved merchandise. However, such souks can hardly be depended on to offer appropriate standards of ‘collective commodities’ such as ecological conservation. Oates advocates for the benefit-cost analysis in addressing environmental issues such as pollution to develop appropriate environmental policies (Oates XV-XX).
Analysis and conclusion
The benefit-cost analysis advocated for by Oates in resolving environmental issues given social systems appears to be suitable in the contemporary world. I agree with this assertion due to the degradation of the environment that has taken a huge toll on scarce resources such as clean air and water. The cost-benefit analysis will assist in attaching a price to economic activities. It is essential to explore resources to sustain the economy.
However, in some cases, the costs outweigh the benefits realized from these activities. It is hence imperative to enact environmental regulation that will present the social system with maximum benefits and the least cost. I support the proposed taxation of these activities by Oates, which will play a key role in the realization of this vision. To achieve this, the relevant authorities in developing environmental policies should ensure a balance between social costs and the inherent benefits.
Overview of the argument, conclusion, and reaction
Oates argues that economists have a role to play in ecological management through benefit-cost analysis that will aid in policy development. To complement these efforts, I argue that in some situations, involving small groups imply unpaid consultations that can yield to the resolution of externalities. However, where large groups are involved, such as in urban settings, public regulations through legislation are inevitable. Such regulations are effective in creating proficient levels of contamination reduction.
Although most of the production processes are beneficial to society, it is imperative to assess the benefits versus the costs of exploitation of scarce resources. I agree with Oates on the importance of involving economists in developing environmental policies after conducting cost-benefit analysis in addressing the ecological costs given environmental conservation.
Works Cited
Brennan, Timothy. “Discounting the Future: Economics and Ethics.” Resources, 2.4 (1995): 3-6. Print.
Coase, Ronald. “The Problem of Social Cost.” Journal of Law and Economics, 3.2 (1960): 1-44. Print.
Oates, Wallace. “An Economic Perspective on Environmental and Resource Management.” Resource for the Future, 4.1 (2005): XV-XX. Print.