The Coase Theorem Heats Up

    The air conditioning in my apartment has been broken for the past week, and as outside temperatures reach nearly 100 degrees, this malfunction has created almost unbearable living conditions. As I sit in the sickening heat waiting for the maintenance crew to come, I have begun to reflect on what a bargaining remedy for this may look like in Coase's world. In this instance, my three roommates and I are the victims of harm and MSCUVA is the producer of harm, and luckily for us, property rights are clearly defined. MSCUVA owns the property that we are paying to reside in, and they are therefore liable for upholding the terms of the lease agreement we signed, which includes a functioning air conditioning unit. In addition, as Coase did, I will assume there are no transaction costs for negotiating this matter.

    I know that even though MSCUVA is liable, they should only replace our unit if the marginal social cost of doing so is lower than the marginal social benefit. That is, if my roommates and I would be willing to bear the heat in this apartment for a payment lower than the cost of a new air conditioning unit, we could negotiate to receive payment instead of AC, and that would be the socially efficient outcome. According to my research, a central AC unit costs around $16,000, which would be a maximum payment of $4,000 to each roommate if we chose to negotiate instead. While this is a very large sum of money, my roommates and I value functioning AC (especially in Virginia heat) at a much higher price. This means that the cost of replacing our AC is lower than what we would need to be paid to tolerate no AC (MSC<MSB), so they should go through with our replacement request. To extend the Coase Theorem further, I know the efficient solution does not change based on who has property rights. Though the act of spending $4,000 feels quite scary, as I sit in this heat, I can confidently say that if the liability fell onto my roommates and I, I would spend almost any sum of money to get out of this heat. So again, the marginal social benefit of purchasing a new unit is greater than the marginal social cost, and maintenance should hurry up and get here!!