The Coase Theorem In Real Life in London

September 4th, 2013

I was deeply saddened by the passing of Ronald Coase. Despite frequent criticisms of the Coase Theorem–charging that it it is difficult to apply in reality, and that often transaction costs render Coasean bargaining impossible–it is remarkable how often his teachings pop up in real life.

The “Walkie Talkie,” a new flashy tower in London, helps to illustrate the Coase Theorem. This all-glass building reflected sunlight across the street, and actually melted a car. I think everyone would agree that a building reflecting sunlight across the street would qualify as a serious negative externality. What’s the solution? The building will internalize the cost of this dangerous “death-ray” by constructing a temporary sun screen that blocks the reflection until the temperatures drop.

The building’s developers said they last night erected the temporary black sun screen – which measures 10ft high by 13ft long – on the pavement outside affected shops.

They have also closed off three parking bays to prevent further damage to cars.

In building this screen, the developers worked closely with the community, no doubt reaching this compromise to avoid liability.

“We have liaised extensively with local businesses to keep them informed throughout. We have decided on this course of action with their input and agreement.”

We have a similar situation in Dallas, where a new glass tower is shining sunlight onto an adjacent garden. The heat is so strong that the garden has had to be resodded twice. But the developers are taking a very different approach, claiming that it would be too expensive to resurface the entire building.

I think I read his article, “The Problem of Social Cost” in about 4 or 5 classes at GMU. It inspired my article on the Constitutionality of Social Cost. RIP Ronald Coase. “May there be no transaction costs in heaven.”