Sunday, March 18, 2012

Invoking the Coase Theorem for Fracking Noise

From Kevin Williamson's excellent article in National Review "The Truth About Fracking":

"There are other workaday environmental problems endemic to fracking: For the three to five days a frack lasts, it’s loud — really, really loud, because it’s basically a construction site, with a vast array of pumps and compressors and giant margarita mixers blending sand into the water, and a big battery of generators to run it all. There’s not much to be done about the noise, though you’re typically not fracking real close to densely populated areas.  

A few firms have hit upon the novel approach of simply offering nearby homeowners money to go away for the week, expenses paid, or at least putting them up in a hotel for the duration. (An idled fracking rig might cost you $1 million a week — you can afford to pay a lot of HoJo bills to keep that from happening.)

This is a good example of the Coase theorem, which predicts that bargaining can lead to economically efficient outcomes when externalities (like noise in this case) are present and transaction costs are low.   

HT: Gayle Pooley

15 Comments:

At 3/18/2012 5:30 PM, Blogger juandos said...

Very interesting post...

Glad you linked the Williamson posting...

The question I have regarding the Coase Theorem is the after the fact situation where more 'Josh Fox type frauds' come in afterwards with their lawyers and try to turn a normal property transaction into some sort of extortion scheme, how does the theorem take that into account or does it?

BTW Josh Fox was arrested for unlawful entry at a Congressional hearing...:-)

Sadly Fox wasn't arrested for fraud...

 
At 3/18/2012 7:03 PM, Blogger PeakTrader said...

"...economically efficient outcomes..."

If there's one homeowner and the idle rig costs $1 million a week, then the homeowner can receive up to $1 million a week.

However, the homeowner will weigh the benefits of either staying home for a week or leaving for a week, which will likely be much less than $1 million.

 
At 3/19/2012 5:50 AM, Blogger Ed R said...

Not sure this is a good example of the Coase Theorem at work.

A better illustration would be the trading in sulfur dioxide emissions markets, which (according to many) led to a rapid decline in acid rain from coal-fired power plants.

Some radicals even think this might be an effective measure to reduce CO2 emissions into the atmosphere. Does Prof. Perry think that would be a good idea?

 
At 3/19/2012 6:04 AM, Blogger geoih said...

Quote from Ed R: "A better illustration would be the trading in sulfur dioxide emissions markets, which (according to many) led to a rapid decline in acid rain from coal-fired power plants."

But there is no market for sulfur dioxide emissions.

The government regulatory regime has made any possible market arbitrary, monopolistic, and like everything controlled by the government, subject to largesse and corruption (e.g., see the recent 'green energy' scandals).

 
At 3/19/2012 6:04 AM, Blogger geoih said...

Quote from Ed R: "A better illustration would be the trading in sulfur dioxide emissions markets, which (according to many) led to a rapid decline in acid rain from coal-fired power plants."

But there is no market for sulfur dioxide emissions.

The government regulatory regime has made any possible market arbitrary, monopolistic, and like everything controlled by the government, subject to largesse and corruption (e.g., see the recent 'green energy' scandals).

 
At 3/19/2012 6:24 AM, Blogger Ed R said...

"But there is no market for sulfur dioxide emissions . . . ."????


See: http://www.econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/so2.pdf

Or Wikipedia: "Acid Rain Program"

Or: http://www.nytimes.com/1991/07/17/us/a-new-commodity-to-be-traded-government-permits-for-pollution.html?pagewanted=all&src=pm

 
At 3/19/2012 6:38 AM, Blogger Jon Murphy said...

Ed,

That's a cap & trade program, which is a market-based solution, but not the same as the Coase Theorem,

The Coase Theorem is about bringing the people who are harmed by externalities together with the people who are causing the externalities and them negotiating to reach a solution.

Cap & Trade is some authority saying "Only X amount of externality can be emitted. Here are tradeable permits."

In the first case, those directly effected come together to negotiate an economically efficient solution. In the second, a 3rd party decides what the appropriate amount and then allows offenders to trade permits.

 
At 3/19/2012 7:44 AM, Blogger hassan said...

I enjoyed every bit of it.

 
At 3/19/2012 8:12 AM, Blogger juandos said...

"That's a cap & trade program, which is a market-based solution, but not the same as the Coase Theorem"...

Thank you jon murphy for clarifying that for ed...

Now what about frivolous tort after the Coase dance is over?

 
At 3/19/2012 9:39 AM, Blogger morganovich said...

juandos-

i think that moving to a "loser pays" system is a tort is deemed frivolous would do a lot to mitigate them.

if the loser must cover the legal fees of the winner, it would allow the victims of "stick up torts" where you sue for less than it would cost to mount a defense to defend themselves vigorously and end the free fishing trips plaintiffs with a lawyer on contingency currently get.

 
At 3/19/2012 11:45 AM, Blogger juandos said...

"i think that moving to a "loser pays" system is a tort is deemed frivolous would do a lot to mitigate them"...

I totally agree morganovich, and I remember this Manhattan Institute posting four years ago just reaffirmed it for me: Greater Justice, Lower Cost: How a "Loser Pays" Rule Would Improve the American Legal System

The direct costs of tort litigation, in particular, reached $247 billion in 2006, or $825 per person in the United States...

 
At 3/19/2012 12:10 PM, Blogger Hydra said...

The homeowners have an environmental benefit (peace and quiet) which they are effectively renting to the drilling company, with the expectation they will get their rental property back at the end of the lease.

We need more property rights and more kinds of property in order to enable these kinds of transactions.

 
At 3/19/2012 12:33 PM, Blogger Jon Murphy said...

We need more property rights and more kinds of property in order to enable these kinds of transactions.

Indeed, Hydra. I agree 100%. It may be that we even don't just need more, but better defined. For example, when I own a piece of property, how high (altitude) does my ownership go?

 
At 3/19/2012 1:19 PM, Blogger Ron H. said...

Ed R: ""But there is no market for sulfur dioxide emissions . . . ."????"

You are pointing to an artificial market in *permits*, not emissions. The fact that it was dreamed up by someone in government, and didn't emerge naturally as true markets do, tells you it isn't really a market as we know them.

Based on that distinction, reread geoih's comment.

 
At 3/19/2012 2:35 PM, Blogger juandos said...

One more nugget regarding fracking from the folks at AEI: New York Times reversal: Cornell University research undermines hysteria contention that shale gas is 'dirty'

There are new twists to in the ever-entertaining faux debate over the dangers of shale gas. The New York Times, which turned obscure Cornell University marine ecologist Robert Howarth into an anti-fracking rock star in its questionable spring series on shale gas, and got hammered for it by its own public editor—I‘ll take some of the credit—is finally getting on the science bandwagon.

Last April, the Times ran two articles in a week heavily promoting Howarth’s bizarre claim that shale gas generates more greenhouse gas emissions than the production and use of coal. It would be difficult to overstate the influence of this paper, which ricocheted through the media echo chamber and was even debated in the British parliament and the European Union.

When the Times didn’t report then, and until now has almost systematically ignored, is that almost every independent researcher — at the Environmental Defense Fund, the Natural Resources Defense Council, the Council on Foreign Relations, the Energy Department and numerous independent university teams, including a Carnegie Mellon study partly financed by the Sierra Club — has slammed Howarth’s conclusions.(there's more)

 

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