Application of Coasian Theory in India

This summer, I was able to listen to a presentation by Shruti Rajagopalan, an economist whose primary interests include public choice and development economics. In her presentation, she discussed Gurgaon, a city in India with a population of approximately 2 million. Gurgaon, unlike typical cities in India or around the world, has developed over the past thirty years through the private provision of goods that are typically funded by the government, such as infrastructure, transportation, and security. Rajagopalan’s paper with George Mason economist Alex Tabarrok about the topic can be found here.

This city, where private firms fund public goods based on their individual demand curves, gives us an interesting scenario with which to study externalities. Without government intervention to solve market failures through taxes and government regulation, they are left to Coasian solutions to solve market inefficiencies. These inefficiencies will persist if the Coasian theorem of ‘internalizing the externality’ fails. If we assume that property rights are well defined within the city (not an entirely accurate assumption but reasonable enough to tell the story), then Coase’s theory suggests that bargaining will bring about the socially optimum quantity of desired goods. This may work in certain markets, but Rajagopalan and Tabarrok’s paper suggests that large-scale infrastructure such as sewage and electricity are lacking. This is likely due to the free-rider problem, because there are a large number of individuals in the city, each of whom shares the responsibility of funding the public goods. Therefore, large-scale goods such as sewage will see underinvestment, and waste treatment plants will be operating below the allocatively efficient quantity.

Gurgaon has grown faster and seen relatively more corporate success than most other areas of India, but its private model still has issues such as that which I discussed above. I think that this topic of private provision vs. government solutions is quite interesting, and you may see me bring up this example again if it relates to any future posts about public choice.