Indian River Lagoon: A Free Market Solution

A local cited the Coase Theorem as a solution to the Indian River Lagoon and runoff from Big Sugar.

Indian River LagoonThe local resident cites the example of Big Tobacco as an example for Big Sugar saying that Big Tobacco and not the smoker of the cigarette is the producer of smoke and second hand smoke and therefore liable.

Though Ronald Coase is known for arguing for the privatization of the Post Office and labeled a free-market economist he admitted “he was not opposed to State intervention in the economic “system.” 1

One can calculate the medical costs of the smoke externality to individuals to calculate the damage for which Big Tobacco must pay for a class-action suit.

Too much hope is put in the belief that a court will be able to calculate how much of the damage to the Indian River Lagoon was done, how much of the damages is Big Sugar responsible and liable for and the value of the damage as a result of unfiltered runoff. The courts have a history of ruling in favor of Big Sugar as Randall Holcome said:

There’s an interesting case in Florida. Runoff from sugar farms was polluting the Everglades. A former governor of Florida sued the farmers claiming that the runoff is a nuisance. The sugar farmers shot back that there are government regulations that control their operations, including their runoff flow. They claimed that because they are in compliance, they are not subject to the law of nuisance. When the suit was brought, the court agreed, and threw out the suit. That is now being reconsidered.

Coase’s example involved two private property owners (the farmer and the railroad).  The damage done to the farmer was quantifiable in the value of the crop.

The case of Big Sugar and the Indian River Lagoon is different however. The fish/oysters harmed in the river are not owned by the fisherman as the river is not privately owned as Nicolás Cachanosky discusses:

While Coase is referring to a case where property rights are still undefined, the rabbit example involves damage that happens directly to the crop owner’s property. However, a distinction should be drawn between cases such as an industry polluting a river and affecting the local fishing industry, and a train burning crops or a rabbit eating them.

In the first case, the polluting industry does not affect the private property of the fishing industry. The latter owns neither the river nor the fish in the river. No party can claim that its property has been damaged, yet as Coase points out, the permission to pollute imposes costs on the other party. 2

Will the fishing industry get a portion of suit damages for loss of fish and oysters that they could harvest and sell? No, through the Coase approach the government will be rewarded with the suit proceeds and in doing so fail to provide justice.

Nicolás Cachanosky identifies the problem:

If, by definition, there are externalities but no property rights, how does the Coasean judge calculate efficiency in assigning liability? The problem is that the judge cannot base his decision on the science of human action simply because he lacks the required market information. He may employ a subjective hunch or intuition, but his decision is simply beyond the scope of the science of human action. Thus, the problem of how to assign property rights cannot be answered following an efficiency economic calculation, because
such suggestions presuppose the existence of what is needed.

Therefore the judge cannot properly allocate the resources no more than a socialist leader can efficiently allocate resources.

In Murray Rothbard’s essay “Law, Property Rights and Air Pollution” the argument is made that the Coasean Theory fails as it ignores property rights and seeks to provide “social efficiency”:

” In one such variant, Ronald Coase and Harold Demsetz have asserted that “it doesn’t make any difference” how property rights are allocated in cases of conflicting interests, provided that some property rights are assigned to someone and then defended. In his famous example, Coase discusses a railroad locomotive’s blighting of nearby farms and orchards. To Coase and Demsetz, this damage of a farmer’s crops by the railroad is an “externality” which should, according to the tenets of social efficiency, be internalized. But to these economists, it doesn’t make any difference which of two possible courses of action one adopts. Either one says that the farmer has a property right in his orchard; therefore the railroad should have to pay damages for his loss, and the farmer should be able to enjoin the railroad’s invasive actions. Or the railroad has the right to spew forth smoke wherever it wishes, and if the farmer wishes to stop the smoke, he must pay the railroad to install a smoke abatement device. It does not matter, from the point of view of expenditure of productive resources, which route is taken.

An outcome of the court decision could be for the taxpayers to pay for the filtration of the runoff from Big Sugar.

Furthermore Coase’s theorem fails because, as Walter Block, Murray Rothbard, Gary North and others have pointed out, it completely ignores subjective value.

Rothbard continues:

There are many problems with this theory. First, income and wealth are important to the parties involved, although they might not be to uninvolved economists. It makes a great deal of difference to both of them who has to pay whom. Second, this thesis works only if we deliberately ignore psychological factors. Costs are not only monetary. The farmer might well have an attachment to the orchard…

Costs are purely subjective and not measurable in monetary terms. Coase and Demsetz have a proviso in their indifference thesis that all “transaction costs” be zero. If they are not, then they advocate allocating the property rights to whichever route entails minimum social transaction costs. But once we understand that costs are subjective to each individual and therefore unmeasurable, we see that costs cannot be added up.

Walter Block challenges Coase by making the argument that rather than a crop the farmer had one flower bed that his mother asked as her dying wish for the farmer to care for.  And that this flower bed would have sentimental meaning that would increase the value of the property to the farmer and that the Cosean method ignores these values.

Now let us consider a case exactly like the preceding except for one thing: instead of there being $100,000 worth of crops lying around that can be ruined by smoke pollution, there is but one flower bed that can be so mined. But this a rather special flower bed (to the farmer). Its pecuniary value to other people is nil; however, the farmer’s mother, on her death bed, asked him to care for it. It is so valuable to the farmer in a psychic sense, that only, as it happens, $100,000 would compensate the farmer for the ruination of the flower bed.

If the court finds the manufacturer liable, then the psychic loss case works out as did the pecuniary loss case: the manufacturer will have to install the SPD (used to prevent externalities from smoke) since he can install for less ($75,000) than what a bribe will cost him ($100,000 or more).

If the court does not find the manufacturer liable, then, as before, a bribe of something between $75,000 and $100,000 (say $90,000) will insure the installation of the SPD. If the farmer has $90,000 with which to save his flower bed, the SPD will be installed.

Coase’s view breaks down when we consider the case of psychic income loss where the loser does not have the wherewithal to make a bribe greater than the cost of the SPD ($75,000). All the psychic income in the world may not be enough collateral to support a $90,000 loan to save a flower bed.

In this case, the allocation of resources will depend on the decision of the court. If the court holds the polluter responsible, the SPD will be installed; if the court does not hold the polluter responsible, the SPD will not be installed. 4

How could the subjective value of having a clean, healthy river be accounted for? It would not be and Big Sugar, if found liable, would be off the hook.

The Coase Theorem fails to calculate for subjective value and thus cannot accurately determine the damages done by a polluter to the Indian River Lagoon.  Furthermore the Cosean method would reward the damages to the government rather than the those who suffered actual losses.

An alternative solution to the Indian River Lagoon would be to privatize the Indian River Lagoon.  As there is no true owner of the Indian River Lagoon under government stewardship a reaction to aggression (pollution by runoff) is reliant upon public outcry.

If the Indian River Lagoon was under private ownership the owner could seek recourse immediately when the property was violated through runoff pollution.

The owner of the property could sell fishing leases and recreational permits to consumers.  The owner of the property would have interest in stopping pollution of their property as it would hurt the value consumers would get out of using the Indian River Lagoon.  It would be in the best interest of the owner to maintain a healthy Indian River Lagoon for their current and future income from the lagoon.

Walter Block writes on water privatization 5:

Privatization is the process of transferring governmental ownership, management and control from governmental to private hands. The case for privatization, in general, is straightforward. It consists of utilitarian and de-ontological reasons extolling the benefits of this course of action.

What is the utilitarian case? Individual firms, owned by private persons, are better able to promote consumer sovereignty than are statist agglomerations. This comes about mainly through the weeding out process: those entrepreneurs who cannot satisfy customers are forced into bankruptcy through the competition.

Similarly, the de-ontological case for privatization is simple and straightforward. Individuals, but not governments, can come to own land and other resources through homesteading, the only method which can justify ownership on the basis of the libertarian legal code. Any attempt on the part of the state to engage in this activity is fatally compromised by its essentially coercive nature. Government ownership of resources is only legitimate in the statist philosophy of coercive socialism or fascism. (We here abstract from the limited government libertarian perspective which makes an exception for what it characterizes as legitimate state functions: armies to repel foreign invaders, police to reduce invasive acts on the part of local miscreants, and courts to determine who is who in this regard.)

If the case for privatization is a simple one, so too does this apply to many specific instances of this doctrine. For example, the privatization of public housing, state enterprises in western countries, in the U.S.S.R. and other former communist countries, and the Post Office (which Coase famously argued).

Block continues to highlight how private ownership provides better conservation than governmental control:

It is a well known fact, at least within the free market environmental community, that the cow prospered, due to private property rights which could avert the tragedy of the commons, while the bison almost perished as a species due to lack of same. Nowadays, happily, this problem has been remedied with regard to the buffalo. But the whale, the porpoise, edible fish and other sea species are dealt with, at present, in precisely the same manner which almost accounted for the disappearance of the bison.

Block also discusses how water privatization would be a positive impact on GDP:

One clear benefit would be that world GDP would rise. At present, the oceans and seas account for some 75% of the earth’s surface, but only zx% of world GDP. It need not be the case that each and every acre of the earth’s surface account for the same proportionate contribution to GDP as every other. Deserts are less productive than fertile land. But at least a large part of the vast disparity between productivity on land and in and on water must be due to the beneficial effects of private property rights on land which do not apply to water.

There are many solutions being discussed for the Indian River Lagoon but the most ignored is the free market solution of privatizing the Indian River Lagoon. Not only will private ownership have more interest in preserving a clean lagoon but economic activity would increase due to the found privatization of the Indian River Lagoon and the value entrepreneurs would create with claim to property.

Consumers who value leisure on the Indian River Lagoon could pay for use (they currently pay taxes which go to bureaucratic organizations to manage the lagoon) directly to the entrepreneur who would want to ensure patronage of the lagoon by maintaining water quality.

Fisherman could pay for fishing leases in the Indian River Lagoon. Here too the entrepreneur would have interest in preserving fish population for future income from fisherman.  Much like property owners sell hunting leases to hunters while ensuring game on the property for future use.

Government would benefit the windfall from the sale of the Indian River Lagoon to alleviate debt burdening government coffers at all levels.

There are many proposed solutions to the Indian River Lagoon none of which are as desirable as the free market solution. The lesson from the cow and the bison should be heeded and we should privatize the lagoon.

Find other critiques of Coase here

1. Strictly Confidential: The Private Volker Fund Memos of Murray Rothbard p. 256

2 .Nicolás Cachanosky: Calculation and Equilibrium Problems in the Coase Theorem The Quarterly Journal of Austrian Economics 14, No 1 (2011) p. 66

3. Nicolás Cachanosky: Calculation and Equilibrium Problems in the Coase Theorem The Quarterly Journal of Austrian Economics 14, No 1 (2011) p. 68

4. Walter Block COASE AND DEMSETZ ON PRIVATE PROPERTY RIGHTS Journal of Libertarian Studies Vol. 1, No. 2. pp. 111-115

5. Walter Block Water Privatization

Also See:


Video Lectures: Radical Austrianism, Radical Libertarianism (Lecture 5: Environmentalism) Walter Block and Radical Austrianism, Radical Libertarianism (Lecture 6: Ronald Coase: A Libertarian Critique)

An Austrian Theory of Environmental Economics by Roy Cordato

The Ethics and Economics of Private Property by Hans-Hermann Hoppe

Original letter: Letter: Big Sugar should come to the table before being taken to court »