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QuestionsonLastWeekQuestionson“TheProblemofSocialCost”“Externalities”areJointlyCausedPriceTheoryFrameworkCostofinputs=theirvalueinthebestalternativeusePriceofoutputs=theirvaluetothosewhobuythemFarmerandRancherIfRancherliablefordamagetocropsIfRanchernotliableIfnobargainingpossibleBasicArgumentWithzerotransactioncosts,itneverpaystoleavemoneyonthetable.MoreCases,theSameLogicBlockingthedraftofachimneyBleachingCoconutMattingConfectionervsDoctorJollyAnglerBrewingJudgeUkeStoryThesoundofthemoneypaysforthesmellofthefoodIfTransactionCostsareNotZeroJudge’sBasisforDecidingtheCase

MaySeemIrrelevanttotheEconomist

ButItmaybedesignedtogiveapredictableruleOrbeaproxyforrelevantconsiderationsAFirmasOneSolutionGovernmentRegulationasAnotherConsiderAirPollutioninLosAngelesAndtheBestSolutionMightBeToDoNothingExamples?Coase’sAdvicetoEconomistsGatherdataonhowtransactionsareorganizedMosteconomistsseemtobeunawareofallthis.Whentheyarepreventedfromsleepingatnightbytheroarofjetplanesoverhead(publiclyauthorizedandperhapspubliclyoperated)'areunabletothink(orrest)inthedaybecauseofthenoiseandvibrationfrompassingtrains(publiclyauthorizedandperhapspubliclyoperated),finditdifficulttobreathebecauseoftheodourfromalocalsewagefarm(publiclyauthorizedandperhapspubliclyoperated)andareunabletoescapebecausetheirdrivewaysareblockedbyaroadobstruction(withoutanydoubt,publiclydevised),theirnervesfrayedandmentalbalancedisturbed,theyproceedtodeclaimaboutthedisadvantagesofprivateenterpriseandtheneedforGovernmentregulation.PigouandRailroadsWhatisOwnedisaRight,notaThingIwill,althoughwithreluctance,confinemydiscussiontorabbits.

FurtherPointsTheexistenceofinefficiencyrelativetotheoutcomeproducedbyaperfectlywiseplannerdoesnotnecessarilymeanyouaredoinganythingwrongandgovernmentshouldstepinAnd“governmentsteppingin”isnotwelldefined.SincethegovernmentdefinedtherightsyoustartwithActuallyverylittleanalysisisrequiredtoshowthatanidealworldisbetterthanastateoflaissezfaire,unlessthedefinitionsofastateoflaissezfaireandanidealworldhappentobethesame.Butthewholediscussionislargelyirrelevantforquestionsofeconomicpolicysincewhateverwemayhaveinmindasouridealworld,itisclearthatwehavenotyetdiscoveredhowtogettoitfromwhereweare.Abetterapproachwouldseemtobetostartouranalysiswithasituationapproximatingthatwhichactuallyexists,toexaminetheeffectsofaproposedpolicychangeandtoattempttodecidewhetherthenewsituati

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