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Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:02.90,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:08.90,0:00:12.24,Default,,0000,0000,0000,,- Today we're going to look\Nat the Coase Theorem
Dialogue: 0,0:00:12.42,0:00:15.38,Default,,0000,0000,0000,,and market solutions\Nto externality problems.
Dialogue: 0,0:00:15.38,0:00:18.38,Default,,0000,0000,0000,,Basically what Coase\Npointed out in a remarkable paper
Dialogue: 0,0:00:18.38,0:00:19.74,Default,,0000,0000,0000,,was that the problem\Nwith external benefits
Dialogue: 0,0:00:19.74,0:00:22.74,Default,,0000,0000,0000,,and external cost is not\Nthat they're external,
Dialogue: 0,0:00:22.74,0:00:28.52,Default,,0000,0000,0000,,but rather that property rights\Nin these cases
Dialogue: 0,0:00:28.70,0:00:30.79,Default,,0000,0000,0000,,are vague and uncertain
Dialogue: 0,0:00:30.79,0:00:33.79,Default,,0000,0000,0000,,and that transactions costs\Nare high.
Dialogue: 0,0:00:33.79,0:00:36.79,Default,,0000,0000,0000,,Let's get started with an example.
Dialogue: 0,0:00:38.10,0:00:40.82,Default,,0000,0000,0000,,The Nobel prize-winning\Neconomist, James Meade,
Dialogue: 0,0:00:41.00,0:00:43.80,Default,,0000,0000,0000,,argued that the market\Nwould underprovide
Dialogue: 0,0:00:43.80,0:00:46.80,Default,,0000,0000,0000,,honey and pollination services.
Dialogue: 0,0:00:46.80,0:00:49.06,Default,,0000,0000,0000,,Bees, Meade argued, do two things.
Dialogue: 0,0:00:49.06,0:00:52.06,Default,,0000,0000,0000,,First, they create honey.
Dialogue: 0,0:00:52.06,0:00:54.82,Default,,0000,0000,0000,,That honey is bought\Nand sold in markets
Dialogue: 0,0:00:54.82,0:00:55.82,Default,,0000,0000,0000,,and there's a price for the honey.
Dialogue: 0,0:00:55.82,0:00:57.82,Default,,0000,0000,0000,,Second, however,\Nbees will also fly out
Dialogue: 0,0:00:57.82,0:01:00.21,Default,,0000,0000,0000,,and they'll pollinate the crops\Nof nearby farmers.
Dialogue: 0,0:01:00.21,0:01:03.21,Default,,0000,0000,0000,,That's a very useful service,\Nbut Meade argued
Dialogue: 0,0:01:03.21,0:01:08.05,Default,,0000,0000,0000,,that the farmers wouldn't\Nbe paying for that service.
Dialogue: 0,0:01:08.23,0:01:10.77,Default,,0000,0000,0000,,The pollination services,\NMeade argued,
Dialogue: 0,0:01:10.77,0:01:11.77,Default,,0000,0000,0000,,were an external benefit.
Dialogue: 0,0:01:11.77,0:01:13.77,Default,,0000,0000,0000,,Because the beekeepers\Nwere not being paid
Dialogue: 0,0:01:13.77,0:01:16.30,Default,,0000,0000,0000,,for these useful\Npollination services,
Dialogue: 0,0:01:16.30,0:01:19.30,Default,,0000,0000,0000,,there would be too few bees,\Nand as a result, too little honey,
Dialogue: 0,0:01:19.30,0:01:22.75,Default,,0000,0000,0000,,and also too little crops\Nand too little pollination services.
Dialogue: 0,0:01:25.85,0:01:28.12,Default,,0000,0000,0000,,However, another economist,\NSteven Cheung,
Dialogue: 0,0:01:28.12,0:01:31.12,Default,,0000,0000,0000,,proved that the Nobel Prize winner\Nwas wrong,
Dialogue: 0,0:01:31.12,0:01:36.27,Default,,0000,0000,0000,,and he did so\Nby consulting the Yellow Pages.
Dialogue: 0,0:01:36.45,0:01:40.45,Default,,0000,0000,0000,,Cheung discovered that pollination\Nin the United States, in fact,
Dialogue: 0,0:01:40.45,0:01:43.45,Default,,0000,0000,0000,,is a $15 billion industry.
Dialogue: 0,0:01:43.45,0:01:44.95,Default,,0000,0000,0000,,Beekeepers regularly truck\Ntheir bee colonies
Dialogue: 0,0:01:44.95,0:01:47.95,Default,,0000,0000,0000,,around the country and they sell
Dialogue: 0,0:01:47.95,0:01:51.35,Default,,0000,0000,0000,,their pollination services\Nto farmers.
Dialogue: 0,0:01:51.35,0:01:54.35,Default,,0000,0000,0000,,Because the farmers\Nare paying the beekeepers
Dialogue: 0,0:01:54.35,0:01:55.98,Default,,0000,0000,0000,,for the services of the bees,
Dialogue: 0,0:01:55.98,0:01:58.98,Default,,0000,0000,0000,,the benefits in fact\Nare not external --
Dialogue: 0,0:01:58.98,0:02:03.27,Default,,0000,0000,0000,,they're not on bystanders --\Nand the market works.
Dialogue: 0,0:02:03.27,0:02:06.27,Default,,0000,0000,0000,,So why did Meade get it wrong?
Dialogue: 0,0:02:06.27,0:02:08.50,Default,,0000,0000,0000,,What about the bees,\Nand what about the farmers,
Dialogue: 0,0:02:08.50,0:02:11.50,Default,,0000,0000,0000,,made it possible\Nfor this externality problem
Dialogue: 0,0:02:11.50,0:02:14.25,Default,,0000,0000,0000,,to be solved by markets
Dialogue: 0,0:02:14.25,0:02:17.25,Default,,0000,0000,0000,,when many other\Nexternality problems are not?
Dialogue: 0,0:02:17.25,0:02:18.84,Default,,0000,0000,0000,,The market for pollination works
Dialogue: 0,0:02:18.84,0:02:21.84,Default,,0000,0000,0000,,despite the fact that bees seem\Nto create this external benefit
Dialogue: 0,0:02:21.84,0:02:27.68,Default,,0000,0000,0000,,because transactions costs are low.
Dialogue: 0,0:02:27.68,0:02:30.94,Default,,0000,0000,0000,,That is, all of the costs\Nnecessary for buyers and sellers
Dialogue: 0,0:02:30.94,0:02:33.94,Default,,0000,0000,0000,,to reach an agreement are low.
Dialogue: 0,0:02:33.94,0:02:37.72,Default,,0000,0000,0000,,In particular,\Nbees simply don't fly very far.
Dialogue: 0,0:02:37.72,0:02:40.72,Default,,0000,0000,0000,,So an agreement between\None beekeeper and one farmer
Dialogue: 0,0:02:40.72,0:02:43.38,Default,,0000,0000,0000,,can internalize all the externality.
Dialogue: 0,0:02:43.38,0:02:46.38,Default,,0000,0000,0000,,That is, if the beekeeper\Nputs his bees
Dialogue: 0,0:02:46.38,0:02:48.84,Default,,0000,0000,0000,,in the middle of the farm,
Dialogue: 0,0:02:48.84,0:02:51.84,Default,,0000,0000,0000,,basically the only crops\Nwhich are going to be pollinated
Dialogue: 0,0:02:51.84,0:02:55.38,Default,,0000,0000,0000,,are the crops\Nof that single farmer.
Dialogue: 0,0:02:55.38,0:02:58.38,Default,,0000,0000,0000,,So once an agreement is made
Dialogue: 0,0:02:58.38,0:03:00.97,Default,,0000,0000,0000,,between that beekeeper\Nand that farmer,
Dialogue: 0,0:03:00.97,0:03:03.97,Default,,0000,0000,0000,,all of the externalities\Nhave been internalized.
Dialogue: 0,0:03:03.97,0:03:07.47,Default,,0000,0000,0000,,There are no bystanders
Dialogue: 0,0:03:07.47,0:03:10.47,Default,,0000,0000,0000,,once the beekeeper and the farmer\Nmake an agreement.
Dialogue: 0,0:03:10.47,0:03:13.59,Default,,0000,0000,0000,,Moreover, the property rights here\Nare very clear.
Dialogue: 0,0:03:13.59,0:03:16.59,Default,,0000,0000,0000,,The beekeeper has\Nthe rights to the honey.
Dialogue: 0,0:03:16.59,0:03:20.91,Default,,0000,0000,0000,,The farmer owns the crops\Nthat the bees pollinate.
Dialogue: 0,0:03:21.09,0:03:24.25,Default,,0000,0000,0000,,There isn't going to be a lot\Nof bargaining and disagreement
Dialogue: 0,0:03:24.25,0:03:25.25,Default,,0000,0000,0000,,about who owns what.
Dialogue: 0,0:03:25.25,0:03:27.25,Default,,0000,0000,0000,,The property rights are clear.
Dialogue: 0,0:03:27.25,0:03:29.07,Default,,0000,0000,0000,,In other cases of externalities,
Dialogue: 0,0:03:29.07,0:03:32.07,Default,,0000,0000,0000,,some of the ones\Nwe've looked at previously,
Dialogue: 0,0:03:32.07,0:03:34.75,Default,,0000,0000,0000,,neither of these things are true.
Dialogue: 0,0:03:34.75,0:03:37.75,Default,,0000,0000,0000,,Transactions costs are high\Nand property rights are unclear.
Dialogue: 0,0:03:37.75,0:03:43.30,Default,,0000,0000,0000,,Let's compare with pollution\Nand flu shots.
Dialogue: 0,0:03:43.48,0:03:45.44,Default,,0000,0000,0000,,In both cases here,\Nthe transactions costs are high
Dialogue: 0,0:03:45.44,0:03:48.44,Default,,0000,0000,0000,,and property rights\Nare unclear and uncertain.
Dialogue: 0,0:03:48.44,0:03:53.18,Default,,0000,0000,0000,,Consider pollution:\Nthere's an external cost --
Dialogue: 0,0:03:53.36,0:03:55.26,Default,,0000,0000,0000,,the factory is putting\Nlots of pollution up into the sky,
Dialogue: 0,0:03:55.26,0:03:56.26,Default,,0000,0000,0000,,but on who?
Dialogue: 0,0:03:56.26,0:03:58.26,Default,,0000,0000,0000,,It's not necessarily on the people
Dialogue: 0,0:03:58.26,0:04:00.33,Default,,0000,0000,0000,,who live right next door\Nto the factory.
Dialogue: 0,0:04:00.33,0:04:03.33,Default,,0000,0000,0000,,The pollution\Ncould be causing acid rain,
Dialogue: 0,0:04:03.33,0:04:07.07,Default,,0000,0000,0000,,which is ruining lakes\Nhundreds of miles away,
Dialogue: 0,0:04:07.25,0:04:09.19,Default,,0000,0000,0000,,or it could be causing\Nglobal warming
Dialogue: 0,0:04:09.19,0:04:10.19,Default,,0000,0000,0000,,which is increasing sea levels
Dialogue: 0,0:04:10.19,0:04:12.19,Default,,0000,0000,0000,,and ruining people's lives\Nthousands of miles away.
Dialogue: 0,0:04:12.19,0:04:14.40,Default,,0000,0000,0000,,And exactly what are the costs?\NHow much?
Dialogue: 0,0:04:14.40,0:04:17.40,Default,,0000,0000,0000,,How can we measure these costs?\NIt's not obvious.
Dialogue: 0,0:04:17.40,0:04:21.86,Default,,0000,0000,0000,,Moreover, who has the rights here?
Dialogue: 0,0:04:21.86,0:04:24.86,Default,,0000,0000,0000,,Should the factory\Nhave to pay to pollute?
Dialogue: 0,0:04:24.86,0:04:27.52,Default,,0000,0000,0000,,Should it have to pay the people
Dialogue: 0,0:04:27.52,0:04:30.52,Default,,0000,0000,0000,,to whom it imposes\Nan external cost?
Dialogue: 0,0:04:30.52,0:04:35.50,Default,,0000,0000,0000,,Or, should the bystanders have\Nto pay the factory not to pollute?
Dialogue: 0,0:04:35.50,0:04:37.12,Default,,0000,0000,0000,,Does the factory\Nhave the right not to pollute,
Dialogue: 0,0:04:37.12,0:04:40.12,Default,,0000,0000,0000,,and do the bystanders\Nhave to pay the factory to stop?
Dialogue: 0,0:04:40.12,0:04:42.79,Default,,0000,0000,0000,,If you think that's obvious,\Nlet's consider a flu shot.
Dialogue: 0,0:04:42.79,0:04:47.07,Default,,0000,0000,0000,,There are external benefits\Nif I get a flu shot.
Dialogue: 0,0:04:47.25,0:04:51.69,Default,,0000,0000,0000,,For example, I'm less likely\Nto sneeze on people on the subway
Dialogue: 0,0:04:51.87,0:04:54.06,Default,,0000,0000,0000,,and give them the flu\Nbut that could be hundreds,
Dialogue: 0,0:04:54.06,0:04:57.06,Default,,0000,0000,0000,,dozens of people,\Nhundreds of people.
Dialogue: 0,0:04:57.06,0:05:01.74,Default,,0000,0000,0000,,I don't know exactly which people\Nget the external benefit.
Dialogue: 0,0:05:01.92,0:05:05.23,Default,,0000,0000,0000,,And how much\Nis this external benefit?
Dialogue: 0,0:05:05.23,0:05:08.23,Default,,0000,0000,0000,,It's hard to measure, once again.
Dialogue: 0,0:05:08.23,0:05:13.11,Default,,0000,0000,0000,,Moreover, should people\Nhave to pay me to get a flu shot
Dialogue: 0,0:05:13.11,0:05:16.11,Default,,0000,0000,0000,,or should I have to pay others\Nif I don't get a shot?
Dialogue: 0,0:05:16.11,0:05:17.11,Default,,0000,0000,0000,,Now, by the way, let's compare\Nthese two things --
Dialogue: 0,0:05:17.11,0:05:19.98,Default,,0000,0000,0000,,the pollution and the flu shot.
Dialogue: 0,0:05:19.98,0:05:22.03,Default,,0000,0000,0000,,If you thought it was obvious
Dialogue: 0,0:05:22.03,0:05:25.03,Default,,0000,0000,0000,,that the factory should have\Nto pay to pollute
Dialogue: 0,0:05:25.03,0:05:27.98,Default,,0000,0000,0000,,and not that the bystanders\Nshould have to pay the factory,
Dialogue: 0,0:05:27.98,0:05:30.98,Default,,0000,0000,0000,,well, consider the flu shot.
Dialogue: 0,0:05:30.98,0:05:33.15,Default,,0000,0000,0000,,Isn't sneezing,\Nif you don't get a flu shot,
Dialogue: 0,0:05:33.15,0:05:36.15,Default,,0000,0000,0000,,isn't sneezing,\Nisn't that like pollution?
Dialogue: 0,0:05:36.15,0:05:39.15,Default,,0000,0000,0000,,Isn't that polluting?
Dialogue: 0,0:05:39.15,0:05:42.15,Default,,0000,0000,0000,,Shouldn't the polluter,\Nthe sneezer have to pay?
Dialogue: 0,0:05:42.15,0:05:44.28,Default,,0000,0000,0000,,So in that case\Nyou might want to argue
Dialogue: 0,0:05:44.28,0:05:47.28,Default,,0000,0000,0000,,that if you don't get a flu shot,\Nyou should have to pay others.
Dialogue: 0,0:05:47.28,0:05:52.90,Default,,0000,0000,0000,,You're polluting on them. Right?
Dialogue: 0,0:05:53.08,0:05:55.99,Default,,0000,0000,0000,,So the rights here\Nare not as obvious
Dialogue: 0,0:05:55.99,0:05:56.99,Default,,0000,0000,0000,,as we might think at first glance.
Dialogue: 0,0:05:56.99,0:05:58.99,Default,,0000,0000,0000,,Moreover, the main point is,\Nis that the transactions costs
Dialogue: 0,0:05:58.99,0:06:02.49,Default,,0000,0000,0000,,of coming to an agreement
Dialogue: 0,0:06:02.67,0:06:04.13,Default,,0000,0000,0000,,between these hundreds\Nor thousands
Dialogue: 0,0:06:04.13,0:06:05.13,Default,,0000,0000,0000,,or perhaps millions of people,
Dialogue: 0,0:06:05.13,0:06:07.13,Default,,0000,0000,0000,,figuring out\Nwhat the external costs are,
Dialogue: 0,0:06:07.13,0:06:12.28,Default,,0000,0000,0000,,making that bargain,\Nthat's going to be very costly.
Dialogue: 0,0:06:12.46,0:06:16.51,Default,,0000,0000,0000,,And, we can't even agree\Non who has the rights here,
Dialogue: 0,0:06:16.69,0:06:18.89,Default,,0000,0000,0000,,or it's very difficult\Nto come to an agreement.
Dialogue: 0,0:06:18.89,0:06:19.89,Default,,0000,0000,0000,,Should the factory have to pay?
Dialogue: 0,0:06:19.89,0:06:21.89,Default,,0000,0000,0000,,Should the factory\Nbe the one to be paid?
Dialogue: 0,0:06:21.89,0:06:24.14,Default,,0000,0000,0000,,Should the person\Ngetting the flu shot be paid,
Dialogue: 0,0:06:24.14,0:06:27.14,Default,,0000,0000,0000,,or should the person not getting\Nthe flu shot have to pay?
Dialogue: 0,0:06:27.14,0:06:32.99,Default,,0000,0000,0000,,The rights here are uncertain,\Nand unclear, and again,
Dialogue: 0,0:06:33.17,0:06:38.37,Default,,0000,0000,0000,,that's also going to make\Ncoming to a market agreement
Dialogue: 0,0:06:38.55,0:06:40.35,Default,,0000,0000,0000,,difficult to do,
Dialogue: 0,0:06:40.35,0:06:41.35,Default,,0000,0000,0000,,and therefore the market\Nisn't going to solve these types
Dialogue: 0,0:06:41.35,0:06:43.35,Default,,0000,0000,0000,,of externality problems\Nvery easily.
Dialogue: 0,0:06:43.35,0:06:48.75,Default,,0000,0000,0000,,So the conclusion here is\Nthat the market can be efficient
Dialogue: 0,0:06:48.93,0:06:50.72,Default,,0000,0000,0000,,even when there are externalities --
Dialogue: 0,0:06:50.72,0:06:53.72,Default,,0000,0000,0000,,when transactions costs are low
Dialogue: 0,0:06:53.72,0:06:56.18,Default,,0000,0000,0000,,and when property rights\Nare clearly defined.
Dialogue: 0,0:06:56.18,0:06:59.18,Default,,0000,0000,0000,,And in fact\Nthat's the Coase Theorem.
Dialogue: 0,0:06:59.18,0:07:00.76,Default,,0000,0000,0000,,If transactions costs are low
Dialogue: 0,0:07:00.76,0:07:03.76,Default,,0000,0000,0000,,and property rights\Nare clearly defined,
Dialogue: 0,0:07:03.76,0:07:06.17,Default,,0000,0000,0000,,private bargains will ensure
Dialogue: 0,0:07:06.17,0:07:07.17,Default,,0000,0000,0000,,that the market equilibrium\Nis efficient
Dialogue: 0,0:07:07.17,0:07:09.17,Default,,0000,0000,0000,,even if there are externalities.
Dialogue: 0,0:07:09.17,0:07:12.92,Default,,0000,0000,0000,,The conditions\Nfor the Coase Theorem to be met,
Dialogue: 0,0:07:13.10,0:07:16.73,Default,,0000,0000,0000,,low transactions costs\Nand clear property rights,
Dialogue: 0,0:07:16.73,0:07:17.73,Default,,0000,0000,0000,,are in practice often not met.
Dialogue: 0,0:07:17.73,0:07:19.73,Default,,0000,0000,0000,,Even so, however,\Nthe theorem does suggest
Dialogue: 0,0:07:19.73,0:07:24.01,Default,,0000,0000,0000,,an alternative approach\Nto externalities.
Dialogue: 0,0:07:24.40,0:07:26.45,Default,,0000,0000,0000,,We've already looked at\Nthe Pigouvian taxes and subsidies,
Dialogue: 0,0:07:26.45,0:07:29.45,Default,,0000,0000,0000,,and command and control.
Dialogue: 0,0:07:29.45,0:07:34.26,Default,,0000,0000,0000,,The Coase Theorem\Nsuggests another solution,
Dialogue: 0,0:07:34.26,0:07:37.26,Default,,0000,0000,0000,,namely the creation of new markets.
Dialogue: 0,0:07:37.26,0:07:40.83,Default,,0000,0000,0000,,If the government\Ncan define property rights
Dialogue: 0,0:07:40.83,0:07:41.83,Default,,0000,0000,0000,,and reduce transactions costs,
Dialogue: 0,0:07:41.83,0:07:43.83,Default,,0000,0000,0000,,then markets can be used\Nto control externality problems.
Dialogue: 0,0:07:43.83,0:07:48.69,Default,,0000,0000,0000,,So the Coase Theorem plus\Na little bit of command and control
Dialogue: 0,0:07:48.87,0:07:53.20,Default,,0000,0000,0000,,in terms of defining property rights\Nand reducing transactions costs,
Dialogue: 0,0:07:53.38,0:07:56.81,Default,,0000,0000,0000,,can create a new form of solution\Nto externality problems.
Dialogue: 0,0:07:56.81,0:07:59.81,Default,,0000,0000,0000,,And in fact tradable, permits is\Nwhat we're going to be looking at
Dialogue: 0,0:07:59.81,0:08:02.44,Default,,0000,0000,0000,,in the next talk.
Dialogue: 0,0:08:02.44,0:08:04.95,Default,,0000,0000,0000,,- [Narrator] If you want\Nto test yourself,
Dialogue: 0,0:08:04.95,0:08:07.95,Default,,0000,0000,0000,,click "Practice Questions."
Dialogue: 0,0:08:07.95,0:08:11.56,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click "Next Video."
Dialogue: 0,0:08:11.56,0:08:14.50,Default,,0000,0000,0000,,♪ [music] ♪