Some of my friends live in a duplex. They live in part of the house, and some other students live in the other part. During Charlottesville's recent cold weather, my friends found out that only their neighbors had control of the heating, and that the heating had been turned up uncomfortably high. This appears not to be a singular problem. My friends sent representatives to negotiate lower temperatures, but they are worried about the upcoming winter.
Upon hearing of this, my reaction was immediately of the Coase Theorem, and I told them that they would definitely be able to come to an agreeable solution for both parts of the house. The property rights are clearly delineated. Transaction costs are low, since they live in the same house. They will easily be able to approach their neighbors, explain the problem, and find the price such that their neighbors' marginal benefit from payment will exceed the marginal cost to them of keeping the thermostat lower. In fact, even if the situation were reversed and my friends controlled the heat, a deal could still be reached, as their neighbors would then be willing to pay them to raise the house's temperature. It is unfortunate that my friends would have to pay extra money to be able to control the temperature in their house. However, they also told me one other thing that ensures their neighbors will be willing to compromise: my friends have the power to shut off the duplex's water.
3 comments:
I think this is a good example to understand why the Coase theorem is not easy to apply in real-life. I'd like to write about why this problem is not too simple to solve with Coase's approach. Firstly, the problem may be derived from the inefficient heating system of the house. The part of the house your friends live may be too hot even people in the other part of the house set the temperature relatively low degrees. This makes the problem more complex because the desired temperature of the thermostat for your friends may cause the other residents to freeze. Therefore, the marginal cost of keeping the thermostat lower may be substantially higher than their marginal benefit which may set the negotiation price so high that your friends cannot afford it. Another problem with this case is that even if the heating problem may stem from neighbors' desire to live in a house with unusually high temperatures, it is still not easy to find the fair negotiation price. Because their marginal cost to lower the heating down solely depends on an abstract idea, it is not really possible to calculate its material value which may lead the neighbors to overcharge your friends.
My family’s backyard boarders my neighbor’s property with a five foot fence, clearly delineating property lines. Over the past few years, the neighbors have been renting out their home as an Airbnb. As such, they have neglected their lawn care, leading to overgrowth which imposes negative externalities on our view. In the Spring, their weeds grow so high that they hang over our fence and begin to spread seedling on our property. While private marginal cost to my neighbor is negligible, since they aren’t living in the home and it isn’t affecting their renting operation, the negative externalities imposed on the neighborhood produces a greater social marginal cost.
Over the years, transaction costs have been the biggest issue in reaching a Coasian solution. Spring before last, transaction costs were high due to our neighbor’s remote location in Europe and communication barrier. The higher transaction costs led my family to internalize the externality by spraying weed killer over our fence, taming the neighbor’s property. All was to our expense, as it wasn’t worth the time and effort to track down the neighbor and negotiate. This past Spring, our neighbors returned to their house. This lowered transaction costs, facilitating communication and negotiation between the two parties. The transaction resulted in our neighbor agreeing to hire a lawn care company to clean up her yard at her own expense. Although my neighbor had very little financial incentive to improve her lawn (since she has property rights to the externality inducing land), her personal marginal benefit gained from being perceived as a responsible neighbor outweighed the monetary costs of the yardwork.
Although Wesley’s duplex debacle might seems like one that can be easily solved through Coasian channels, the owners should be aware of unanticipated transaction costs or social tensions that might arise and inhibit a logical negotiation. Additionally, the duplex owners might consider appealing to the altruistic nature of their neighbors. Those with the heat controller might take steps to internalize the externality out of ‘goodwill’ intentions, shifting to a Coasian solution.
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