Question

Suppose a pulp and paper mill emits pollution into a river upstream of a commercial fishing operation. The emissions from the mill damage the fishery by reducing the number of fish that can be caught. The mill benefits from emissions as these are a by-product of pulp and paper production.

Describe two objections that have been raised about the usefulness of the Coase theorem.

Answer 1

Coase theorem explains how ‘externalities’ can be productively utilised to ensure a ‘consequence’ that is more closer or reaches the ‘optimal allocation’—keeping the ‘societal effects ‘ in view not just the ‘private costs and benefits’. It is a known fact that economic activities have externalities, more often negative than positive.

In this case, the emissions from the paper and pulp mill are not only affecting the river and its inhabitants ( fishes and other species) but is causing damage to users of the river water for various purposes ( whether it is for drinking, a boat ride and so on). According to Coase theorem, the emissions can be valued and treated thereby seeking to down play the damage especially the ‘financial damage’ in the form of loss of livelihood for fisherman depending on the river for fishing.

      Two objections to this theorem could be : 1. The costs of negotiating a bargain that could be economically viable for all the stakeholders involved is questionable, the basis of assignment of costs is also complex, the pulp and paper mill may not accept that its damage is more than ‘what it perceives’ , it may argue that ‘since it benefits from emissions’ it will not be willing to accept the social costs that the emissions may cause.

2. The disutility created by such emissions cannot be easily quantified since ‘utility’ or satisfaction is a subjective matter. Each stake holder may feel the need to express his or her dissatisfaction uniquely, quantifying it into one monetary amount would not be an effective representation of the consequences of the entire community it is also to be noted that the damage done to the life of fishes and other species getting affected by the emissions is not humanly possible