Remediation and the Coase Theory
Am-Dc 11/04
“Democracy is the recurrent suspicion
that more than half the people are right
more than half the time”. E.B. White

I am the reason that NPR’s fundraising drives are so long. Public radio stations spend countless hours on requests for support. Sure, I enjoy Prairie Home Companion and the other great programs, but I haven’t called.

This illustrates another economic principle, free riding. Free riding is when consumers can take advantage of a good or service without paying for it, and not necessarily illegally. This is possible because it is hard to charge for certain things-such as a fireworks display, for example.

Free riding also happens the government is called on to remedy or subsidize an industry that’s facing economic hardship or feeds the general public good. A product or service may have a positive externality, or spillover benefit. If the number of people willing to pay for that product is inadequate to pay for the good, it may not be produced, regardless of its value. Thus, it is funded publicly, because it is determined to be that beneficial.

Public goods such as dams and military defense are protected from free riding by government financing. The government imposes a tax and the entire public funds these projects. It can be said that deficit spending and the subsequent inflation serves as a tax an all who hold or use money; and some governments find this just as effective for raising funds for public goods.

However, spillover costs not financed by the government are more difficult to manage. A spillover cost might consist of a factory’s pollution discharge that down stream residents are forced to clean up. An example of a spillover benefit could be a situation in which bees kept to produce honey pollinates local farmers crops boosting yields. After the original publication date of this piece, bee wranglers report that revenue from pollination far exceeds honey revenue.

What these externalities have in common is that they are side effects from someone else’s economic activity. Because the spillover (or side effect) is not reflected in the price of the product, it is not a part of the decision-making for that product. Left to the free market, resources, (scarce resources) will be used inefficiently: if the spillover is a benefit, too few will be produced, if the spillover is a cost, the market will provide too many.
Governments have options in externality issues. If a spillover is a cost, the activity or product can be taxed to pay for it. If the spillover produces a benefit, the government can subsidize the activity.

The most efficient solution to problems associated with externalities is to require that spillover be included in the cost assessments so that those engaged in an economic activity can self regulate. For example if property rights include clean air provisions, owners can sue polluters.

In 1991, Dr. Ronald Coase won a Nobel Prize in economics for studies on the significance of transaction costs and property rights in the efficient functioning of the economy. Coase theorized that it didn’t matter who had ownership, as long as property rights were fully allocated and completely free trade of all rights was possible.

The EPA used this theory to develop emissions trading, now used worldwide and with great results. EPA’s resulting acid-rain program achieved greater results in a shorter time span than any other single pollution control plan in history. It helped reduce emissions 30% more than required with an associated cost of 50% of what was expected.

Nevertheless, unless drycleaners become large generators and begin trading emissions, how can we benefit from the Coase’s theory? The Coase theory is best realized through a close relationship between the consumer of a good and the purchaser of the good, in other words, little separation between these two seemingly attached functions. One way we can keep these functions close is thru participation in a Drycleaner Remediation program, like that in my home state of Texas.


An insurance style remediation program might handle a claim like this: the drycleaner files a claim, the insurance company or landlord seeks an appraisal, the insurer selects the remediation firm, the state or federal government determines the success of the remediation, insurance pays for the work, and policy holders share the risk.

In a state lead program, the drycleaner files, the state appraises and chooses the remediation firm; the state assesses the success of the remediation and pays for the work. This is the closest that these functions can be in a risk-sharing program. The only way for these relationships to be closer (therefore more efficient), is for the drycleaner to do all functions himself, which eliminates risk sharing.

Economists always seek the efficiencies that a connection between payer and consumer provides. A few years ago, I gave my kids jobs at the plant with the idea that they would begin taking some financial responsibilities such as clothing purchases, upon themselves. One day while browsing Ann Taylor, my daughter asked how a blouse would look on her. Are answer “great-with your money!” made her lose interest in it, illustrating the importance of that connection.

Some of the most contentious issues of modern governance are those that have a “disconnect” between payer and consumer. Healthcare, public education and social security are examples of issues that will remain difficult to manage far into the future. In the case of education, voucher systems have been proposed in many communities and adopted in a few. Despite some good results, most communities are reluctant to adopt such drastic reform.

Nevertheless, drycleaners don’t need to sacrifice much to find a solution to the efficiencies caused by the disconnect between payer and consumer. Sound state-led drycleaner remediation programs are more efficient than any other system, and could be considered an achievement of drycleaning businessmen working with government. At last, an example of sound economic principles, and an industry working on its own behalf.