Lecture 5

Property Rights, the Coase Theorem, and the Environment

Byeong-Hak Choe

SUNY Geneseo

September 15, 2025

Property Rights, the Coase Theorem, and the Environment

A Pigovian tax makes polluters pay for the external damages they impose on society.
Implicit assumption:
- Society has a right to clean environment and to be compensated for damages.
- Polluters do not have unlimited rights to emit.
Intuitively appealing, but raises a broader question:
- Who owns the right in cases of environmental harm?
- The polluter, or society at large?

Question:
- Does Alpha’s property ownership give him the right to drain?
- Or does Beta (or society) have the right to protection from harm?

Suppose Alpha has the legal right to drain.
- Beta can offer to pay him to keep the wetland intact.
- Beta’s willingness to pay: up to $8,000 (her avoided damages).
- Alpha’s willingness to accept: at least $5,000 (his foregone profit).
- This creates a bargaining range: $5,000–$8,000.
Example outcome: Beta pays Alpha $6,000.
- Alpha gains $1,000 more than draining.
- Beta avoids $8,000 damage, but still pays $6,000 → net $2,000 better off.
- The actual payment depends on each side’s bargaining power.
Efficient result: wetland preserved.

Beta is better off than if Alpha drained ($2,000 net gain).
But she could still feels burdened because:
- She pays a large sum to prevent harm.
- She may believe she should not have to pay at all.
Lesson: Efficiency ≠ Equity.
- Efficient outcomes can still feel unfair.

Imagine a new crop grows well on drained wetlands.
- Alpha’s profit rises to $12,000.
- Beta still faces $8,000 in damages.
Now negotiation is possible:
- Alpha can pay Beta between $8,000 and $12,000.
- Example: $10,000 payment →
  - Alpha nets $2,000.
  - Beta nets $2,000.
Takeaway: Efficient outcome depends on relative benefits and costs, not on initial assignment of rights.

Transaction costs: Expenses of making a deal or negotiation (e.g., legal fees, administrative costs, or costs of bringing parties together).
The Coase Theorem:
- If property rights are well defined and transaction costs are negligible,
- Then private bargaining will lead to efficient allocation of resources,
- Even when externalities are present.
Rights determine who pays whom, but not the final efficient outcome.
Assumes: Perfect information; Few parties; No high legal or enforcement costs.

Company emits 80 tons of effluent into a river.
- Company gains profits (MB of pollution).
- Community bears damages (MC of pollution).

Efficient solution: 50 tons, where MB = MC.
- Beyond 50, extra damage > extra profit.
- Below 50, extra profit > extra damage.

Assume:
- Pollution rights sell for $150 each.
- The community owns the rights.

At 50 tons: MB = MC = $150.
- Company’s payments = $7,500 (area B + C).
- Company benefits = $13,750 (area A + B + C).
- Total community damages = $3,750 (area C).

Net results:
- Company’ Net Benefit: $6,250.
- Community’s Net Benefit: $3,750.
- Social Welfare = $10,000.

Assume:
- Pollution rights sell for $150 each.
- The company owns the rights.

At 50 tons: MB = MC = $150.
- Community’s payments = $7,500 (area D + E).
- Company benefits = $13,750 (area A + B + C).
- Total community damages = $3,750 (area C).

Net results:
- Company’s Net Benefit: $18,250.
- Community’ Net Benefit:
  -$8,250.
- Social Welfare = $10,000.
Distribution of welfare differs.

NYC must provide clean drinking water for 8.4 million people.
- Option 1: Build massive water filtration plants (very costly).
- Option 2: Protect watersheds upstream by buying land & easements.

NYC purchased property rights voluntarily (no eminent domain used):
- Acquire 355,000+ acres from willing sellers; Pay fair market value.
Cheaper than filtration; Clean water maintained; Example of Coasean bargaining on a large scale.

Eminent Domain: Gov’t may take land for public use but must pay compensation (Fifth Amendment).
- Taking: Any gov’t action that deprives an owner of property rights.
Regulatory Takings: Laws that restrict land use and may reduce property value.
Supreme Court Ruling – Lucas v. South Carolina Coastal Council (1992):
- South Carolina Law barred building on Lucas’s beachfront lots.
- Ruling: A regulation that removes all economic use of land is a taking → compensation required.

Type of Taking	Definition	Compensation?
Total Taking	All economic use eliminated	✅ Yes
Partial Taking	Some economic use remains	❌ No

Transaction costs:
- With many affected parties, bargaining may be impossible.
Free-rider effect:
- Some communities hope others will pay for pollution reduction.
Holdout effect:
- One party can block agreement by demanding excess payment.
Equity concerns:
- Poor communities may lack resources to “buy out” polluters.
Nonhuman/ecosystem impacts:
- Who bargains for species, biodiversity, or future generations?

Defined by EPA: “Fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income.”
Example: Flint, Michigan Water Crisis (2014–)
- City switched to Flint River water, which was corrosive and not treated properly → lead contamination.
- 6,000–12,000 children exposed.
- Community largely low-income and African-American.
Lesson: Markets alone cannot ensure fairness in environmental outcomes.

Race, Poverty and Hazardous Waste Facilities

Do polluting industries choose to locate in poor and minority communities—where land is cheaper and political resistance is weaker?
Or do low-income households move in near toxic storage or disposal facility (TSDF) after they are built, attracted by lower housing costs?
Pastor et al. (2016), “Which Came First? Toxic Facilities, Minority Move-In, and Environmental Justice”:
- A 10% point increase in minority population share was linked to ~34–39% higher odds of a TSDF siting.
- The pace of increase in minority residents near TSDFs was similar to the pace elsewhere in the region.