When Nobody Takes Out the Trash

I currently live in a house with 15 other people. A major issue within the house right now is that nobody except for a select few (such as myself) ever take out the trash. In this post, I will use Ronald Coase’s framework to try to find a solution. 

Firstly, we must determine what kind of externality we are dealing with. This situation is slightly more complicated than the basic “Confectioner vs. Doctor” example. In my house, there are 15 people, each of whom acts as both a “Producer of Trash” and a “Consumer of Cleanliness”. In this case, we have a negative production externality, where the allocatively efficient output would be less trash produced at a higher price. When individuals produce more trash than the allocatively efficient quantity (where Q = Trash Thrown Away – Trash Taken Out), then it damages the utility of the consumers of cleanliness. It may seem that this should not be an issue, because in this example the consumers are the same individuals as the producers, but different preferences between individuals create a market inefficiency. For ease of explanation, let’s say there are two groups of people. Group 1 has no preference between a clean house and a dirty house, so their marginal cost of producing trash is zero. Group 2 does prefer a clean house to a dirty house, has a high marginal cost of producing trash, and therefore takes out the trash frequently to decrease their overall production. In the market with an externality, Group 1’s actions as producers harm Group 2’s utility as consumers, because the individuals in Group 2 incur a cost by living in the dirty house.

Coase’s theorem would suggest that the best way for me to deal with this problem as a member of Group 2 is to pay the members of Group 1 a negotiated amount so that they take out the trash. This would produce the allocatively efficient outcome because this payment would shift Group 1’s production cost curve up, and they would produce less trash. Group 1 would never pay more than the value of damages that the externality causes them. Therefore, Coase’s strategy should work and solve our house’s trash problem. However, while this solution should theoretically work, I do not think it will happen, even if that means I am acting economically irrational- I just cannot stomach the idea of actually paying my friends to do what is expected of them and take out the trash.  In this example, the cost of violating my moral principles serves as a transaction cost, which violates the assumptions of Coase's theorem and explains why this solution may not actually work in practice.