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Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.20,0:00:05.76,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:08.80,0:00:10.70,Default,,0000,0000,0000,,- [Alex] Today we're going to look\Nat the Coase Theorem
Dialogue: 0,0:00:10.70,0:00:13.85,Default,,0000,0000,0000,,and market solutions\Nto externality problems.
Dialogue: 0,0:00:14.40,0:00:17.70,Default,,0000,0000,0000,,Basically what Coase\Npointed out in a remarkable paper
Dialogue: 0,0:00:18.00,0:00:20.02,Default,,0000,0000,0000,,was that the problem\Nwith external benefits
Dialogue: 0,0:00:20.02,0:00:23.27,Default,,0000,0000,0000,,and external costs is not\Nthat they're external,
Dialogue: 0,0:00:23.84,0:00:26.91,Default,,0000,0000,0000,,but rather that property rights\Nin these cases
Dialogue: 0,0:00:26.91,0:00:28.68,Default,,0000,0000,0000,,are vague and uncertain
Dialogue: 0,0:00:28.68,0:00:31.26,Default,,0000,0000,0000,,and that transactions costs\Nare high.
Dialogue: 0,0:00:31.86,0:00:33.54,Default,,0000,0000,0000,,Let's get started with an example.
Dialogue: 0,0:00:38.10,0:00:40.87,Default,,0000,0000,0000,,The Nobel prize-winning\Neconomist, James Meade,
Dialogue: 0,0:00:40.87,0:00:43.10,Default,,0000,0000,0000,,argued that the market\Nwould underprovide
Dialogue: 0,0:00:43.10,0:00:45.55,Default,,0000,0000,0000,,honey and pollination services.
Dialogue: 0,0:00:46.10,0:00:48.46,Default,,0000,0000,0000,,Bees, Meade argued, do two things.
Dialogue: 0,0:00:48.46,0:00:50.24,Default,,0000,0000,0000,,First, they create honey.
Dialogue: 0,0:00:50.47,0:00:52.33,Default,,0000,0000,0000,,That honey is bought\Nand sold in markets
Dialogue: 0,0:00:52.33,0:00:54.02,Default,,0000,0000,0000,,and there's a price for the honey.
Dialogue: 0,0:00:54.36,0:00:57.57,Default,,0000,0000,0000,,Second, however,\Nbees will also fly out
Dialogue: 0,0:00:57.57,0:01:00.83,Default,,0000,0000,0000,,and they'll pollinate the crops\Nof nearby farmers.
Dialogue: 0,0:01:01.17,0:01:03.07,Default,,0000,0000,0000,,That's a very useful service,\Nbut Meade argued
Dialogue: 0,0:01:03.07,0:01:07.16,Default,,0000,0000,0000,,that the farmers wouldn't\Nbe paying for that service.
Dialogue: 0,0:01:07.38,0:01:09.71,Default,,0000,0000,0000,,The pollination services,\NMeade argued,
Dialogue: 0,0:01:09.71,0:01:11.65,Default,,0000,0000,0000,,were an external benefit.
Dialogue: 0,0:01:11.90,0:01:14.70,Default,,0000,0000,0000,,Because the beekeepers\Nwere not being paid
Dialogue: 0,0:01:14.70,0:01:17.04,Default,,0000,0000,0000,,for these useful\Npollination services,
Dialogue: 0,0:01:17.25,0:01:20.99,Default,,0000,0000,0000,,there would be too few bees,\Nand as a result, too little honey,
Dialogue: 0,0:01:20.99,0:01:24.45,Default,,0000,0000,0000,,and also too little crops\Nand too little pollination services.
Dialogue: 0,0:01:25.67,0:01:29.11,Default,,0000,0000,0000,,However, another economist,\NSteven Cheung,
Dialogue: 0,0:01:29.11,0:01:31.71,Default,,0000,0000,0000,,proved that the Nobel Prize winner\Nwas wrong,
Dialogue: 0,0:01:31.71,0:01:34.68,Default,,0000,0000,0000,,and he did so\Nby consulting the Yellow Pages.
Dialogue: 0,0:01:35.12,0:01:38.34,Default,,0000,0000,0000,,Cheung discovered that pollination\Nin the United States, in fact,
Dialogue: 0,0:01:38.34,0:01:41.31,Default,,0000,0000,0000,,is a $15 billion industry.
Dialogue: 0,0:01:42.29,0:01:45.33,Default,,0000,0000,0000,,Beekeepers regularly truck\Ntheir bee colonies
Dialogue: 0,0:01:45.33,0:01:47.67,Default,,0000,0000,0000,,around the country and they sell
Dialogue: 0,0:01:47.67,0:01:50.32,Default,,0000,0000,0000,,their pollination services\Nto farmers.
Dialogue: 0,0:01:50.79,0:01:54.20,Default,,0000,0000,0000,,Because the farmers\Nare paying the beekeepers
Dialogue: 0,0:01:54.20,0:01:56.06,Default,,0000,0000,0000,,for the services of the bees,
Dialogue: 0,0:01:56.06,0:01:58.11,Default,,0000,0000,0000,,the benefits in fact\Nare not external,
Dialogue: 0,0:01:58.11,0:02:02.17,Default,,0000,0000,0000,,they're not on bystanders --\Nand the market works.
Dialogue: 0,0:02:02.90,0:02:05.03,Default,,0000,0000,0000,,So why did Meade get it wrong?
Dialogue: 0,0:02:05.44,0:02:08.68,Default,,0000,0000,0000,,What about the bees,\Nand what about the farmers,
Dialogue: 0,0:02:08.68,0:02:11.40,Default,,0000,0000,0000,,made it possible\Nfor this externality problem
Dialogue: 0,0:02:11.40,0:02:13.15,Default,,0000,0000,0000,,to be solved by markets
Dialogue: 0,0:02:13.15,0:02:16.01,Default,,0000,0000,0000,,when many other\Nexternality problems are not?
Dialogue: 0,0:02:17.25,0:02:18.84,Default,,0000,0000,0000,,The market for pollination works
Dialogue: 0,0:02:18.84,0:02:23.24,Default,,0000,0000,0000,,despite the fact that bees seem\Nto create this external benefit
Dialogue: 0,0:02:23.62,0:02:26.10,Default,,0000,0000,0000,,because transactions costs are low.
Dialogue: 0,0:02:26.38,0:02:29.25,Default,,0000,0000,0000,,That is, all of the costs\Nnecessary for buyers and sellers
Dialogue: 0,0:02:29.25,0:02:31.30,Default,,0000,0000,0000,,to reach an agreement are low.
Dialogue: 0,0:02:31.65,0:02:35.96,Default,,0000,0000,0000,,In particular,\Nbees simply don't fly very far.
Dialogue: 0,0:02:36.66,0:02:40.09,Default,,0000,0000,0000,,So an agreement between\None beekeeper and one farmer
Dialogue: 0,0:02:40.54,0:02:43.16,Default,,0000,0000,0000,,can internalize all the externality.
Dialogue: 0,0:02:43.61,0:02:45.61,Default,,0000,0000,0000,,That is, if the beekeeper\Nputs his bees
Dialogue: 0,0:02:45.61,0:02:47.16,Default,,0000,0000,0000,,in the middle of the farm,
Dialogue: 0,0:02:47.43,0:02:51.45,Default,,0000,0000,0000,,basically the only crops\Nwhich are going to be pollinated
Dialogue: 0,0:02:51.45,0:02:54.19,Default,,0000,0000,0000,,are the crops\Nof that single farmer.
Dialogue: 0,0:02:55.04,0:02:56.98,Default,,0000,0000,0000,,So once an agreement is made
Dialogue: 0,0:02:56.98,0:02:59.66,Default,,0000,0000,0000,,between that beekeeper\Nand that farmer,
Dialogue: 0,0:02:59.66,0:03:02.96,Default,,0000,0000,0000,,all of the externalities\Nhave been internalized.
Dialogue: 0,0:03:02.96,0:03:04.88,Default,,0000,0000,0000,,There are no bystanders
Dialogue: 0,0:03:05.46,0:03:08.34,Default,,0000,0000,0000,,once the beekeeper and the farmer\Nmake an agreement.
Dialogue: 0,0:03:09.09,0:03:12.51,Default,,0000,0000,0000,,Moreover, the property rights here\Nare very clear.
Dialogue: 0,0:03:12.92,0:03:15.88,Default,,0000,0000,0000,,The beekeeper has\Nthe rights to the honey.
Dialogue: 0,0:03:16.38,0:03:19.79,Default,,0000,0000,0000,,The farmer owns the crops\Nthat the bees pollinate.
Dialogue: 0,0:03:19.79,0:03:22.75,Default,,0000,0000,0000,,There isn't going to be a lot\Nof bargaining and disagreement
Dialogue: 0,0:03:22.75,0:03:24.55,Default,,0000,0000,0000,,about who owns what.
Dialogue: 0,0:03:24.55,0:03:26.68,Default,,0000,0000,0000,,The property rights are clear.
Dialogue: 0,0:03:26.99,0:03:29.34,Default,,0000,0000,0000,,In other cases of externalities,
Dialogue: 0,0:03:29.34,0:03:31.98,Default,,0000,0000,0000,,some of the ones\Nwe've looked at previously,
Dialogue: 0,0:03:31.98,0:03:34.31,Default,,0000,0000,0000,,neither of these things are true.
Dialogue: 0,0:03:34.86,0:03:38.89,Default,,0000,0000,0000,,Transactions costs are high\Nand property rights are unclear.
Dialogue: 0,0:03:40.20,0:03:42.32,Default,,0000,0000,0000,,Let's compare with pollution\Nand flu shots.
Dialogue: 0,0:03:42.52,0:03:45.44,Default,,0000,0000,0000,,In both cases here,\Nthe transactions costs are high
Dialogue: 0,0:03:45.44,0:03:48.19,Default,,0000,0000,0000,,and property rights\Nare unclear and uncertain.
Dialogue: 0,0:03:48.41,0:03:51.55,Default,,0000,0000,0000,,Consider pollution:\Nthere's an external cost --
Dialogue: 0,0:03:51.72,0:03:54.70,Default,,0000,0000,0000,,the factory is putting\Nlots of pollution up into the sky,
Dialogue: 0,0:03:55.02,0:03:56.10,Default,,0000,0000,0000,,but on who?
Dialogue: 0,0:03:56.38,0:03:57.99,Default,,0000,0000,0000,,It's not necessarily on the people
Dialogue: 0,0:03:57.99,0:04:00.33,Default,,0000,0000,0000,,who live right next door\Nto the factory.
Dialogue: 0,0:04:00.74,0:04:03.23,Default,,0000,0000,0000,,The pollution\Ncould be causing acid rain,
Dialogue: 0,0:04:03.23,0:04:05.65,Default,,0000,0000,0000,,which is ruining lakes\Nhundreds of miles away,
Dialogue: 0,0:04:05.65,0:04:07.54,Default,,0000,0000,0000,,or it could be causing\Nglobal warming
Dialogue: 0,0:04:07.54,0:04:09.27,Default,,0000,0000,0000,,which is increasing sea levels
Dialogue: 0,0:04:09.27,0:04:12.48,Default,,0000,0000,0000,,and ruining people's lives\Nthousands of miles away.
Dialogue: 0,0:04:12.74,0:04:15.23,Default,,0000,0000,0000,,And exactly what are the costs?\NHow much?
Dialogue: 0,0:04:15.23,0:04:18.15,Default,,0000,0000,0000,,How can we measure these costs?\NIt's not obvious.
Dialogue: 0,0:04:19.38,0:04:22.10,Default,,0000,0000,0000,,Moreover, who has the rights here?
Dialogue: 0,0:04:22.53,0:04:24.100,Default,,0000,0000,0000,,Should the factory\Nhave to pay to pollute?
Dialogue: 0,0:04:24.100,0:04:26.73,Default,,0000,0000,0000,,Should it have to pay the people
Dialogue: 0,0:04:26.73,0:04:29.56,Default,,0000,0000,0000,,to whom it imposes\Nan external cost?
Dialogue: 0,0:04:29.56,0:04:34.66,Default,,0000,0000,0000,,Or, should the bystanders have\Nto pay the factory not to pollute?
Dialogue: 0,0:04:34.66,0:04:37.12,Default,,0000,0000,0000,,Does the factory\Nhave the right not to pollute,
Dialogue: 0,0:04:37.12,0:04:40.29,Default,,0000,0000,0000,,and do the bystanders\Nhave to pay the factory to stop?
Dialogue: 0,0:04:41.28,0:04:44.04,Default,,0000,0000,0000,,If you think that's obvious,\Nlet's consider a flu shot.
Dialogue: 0,0:04:44.70,0:04:46.66,Default,,0000,0000,0000,,There are external benefits.
Dialogue: 0,0:04:46.66,0:04:48.24,Default,,0000,0000,0000,,If I get a flu shot, for example,
Dialogue: 0,0:04:48.24,0:04:51.46,Default,,0000,0000,0000,,I'm less likely to sneeze\Non people on the subway
Dialogue: 0,0:04:51.46,0:04:52.93,Default,,0000,0000,0000,,and give them the flu.
Dialogue: 0,0:04:53.05,0:04:54.48,Default,,0000,0000,0000,,But that could be hundreds,
Dialogue: 0,0:04:55.30,0:04:56.83,Default,,0000,0000,0000,,dozens of people,\Nhundreds of people.
Dialogue: 0,0:04:56.83,0:05:00.60,Default,,0000,0000,0000,,I don't know exactly which people\Nget the external benefit.
Dialogue: 0,0:05:00.87,0:05:02.89,Default,,0000,0000,0000,,And how much\Nis this external benefit?
Dialogue: 0,0:05:02.89,0:05:04.90,Default,,0000,0000,0000,,It's hard to measure, once again.
Dialogue: 0,0:05:06.03,0:05:10.14,Default,,0000,0000,0000,,Moreover, should people\Nhave to pay me to get a flu shot
Dialogue: 0,0:05:10.62,0:05:14.99,Default,,0000,0000,0000,,or should I have to pay others\Nif I don't get a shot?
Dialogue: 0,0:05:16.06,0:05:17.88,Default,,0000,0000,0000,,Now, by the way, let's compare\Nthese two things --
Dialogue: 0,0:05:17.88,0:05:19.66,Default,,0000,0000,0000,,the pollution and the flu shot.
Dialogue: 0,0:05:19.66,0:05:21.58,Default,,0000,0000,0000,,If you thought it was obvious
Dialogue: 0,0:05:21.58,0:05:24.42,Default,,0000,0000,0000,,that the factory should have\Nto pay to pollute
Dialogue: 0,0:05:24.94,0:05:28.28,Default,,0000,0000,0000,,and not that the bystanders\Nshould have to pay the factory,
Dialogue: 0,0:05:28.28,0:05:30.22,Default,,0000,0000,0000,,well, consider the flu shot.
Dialogue: 0,0:05:30.90,0:05:33.69,Default,,0000,0000,0000,,Isn't sneezing,\Nif you don't get a flu shot,
Dialogue: 0,0:05:33.69,0:05:36.84,Default,,0000,0000,0000,,isn't sneezing,\Nisn't that like pollution?
Dialogue: 0,0:05:37.12,0:05:38.69,Default,,0000,0000,0000,,Isn't that polluting?
Dialogue: 0,0:05:38.69,0:05:41.42,Default,,0000,0000,0000,,Shouldn't the polluter,\Nthe sneezer have to pay?
Dialogue: 0,0:05:41.89,0:05:44.28,Default,,0000,0000,0000,,So in that case\Nyou might want to argue
Dialogue: 0,0:05:44.68,0:05:48.27,Default,,0000,0000,0000,,that if you don't get a flu shot,\Nyou should have to pay others.
Dialogue: 0,0:05:48.60,0:05:50.97,Default,,0000,0000,0000,,You're polluting on them, right?
Dialogue: 0,0:05:51.24,0:05:53.53,Default,,0000,0000,0000,,So the rights here\Nare not as obvious
Dialogue: 0,0:05:53.53,0:05:55.49,Default,,0000,0000,0000,,as we might think at first glance.
Dialogue: 0,0:05:55.99,0:05:59.92,Default,,0000,0000,0000,,Moreover, the main point is\Nthat the transactions costs
Dialogue: 0,0:05:59.92,0:06:01.57,Default,,0000,0000,0000,,of coming to an agreement
Dialogue: 0,0:06:01.57,0:06:03.03,Default,,0000,0000,0000,,between these hundreds\Nor thousands
Dialogue: 0,0:06:03.03,0:06:04.90,Default,,0000,0000,0000,,or perhaps millions of people,
Dialogue: 0,0:06:05.13,0:06:07.15,Default,,0000,0000,0000,,figuring out\Nwhat the external costs are,
Dialogue: 0,0:06:07.15,0:06:10.37,Default,,0000,0000,0000,,making that bargain,\Nthat's going to be very costly.
Dialogue: 0,0:06:11.13,0:06:14.79,Default,,0000,0000,0000,,And, we can't even agree\Non who has the rights here,
Dialogue: 0,0:06:15.05,0:06:17.37,Default,,0000,0000,0000,,or it's very difficult\Nto come to an agreement.
Dialogue: 0,0:06:17.56,0:06:19.21,Default,,0000,0000,0000,,Should the factory have to pay?
Dialogue: 0,0:06:19.21,0:06:21.59,Default,,0000,0000,0000,,Should the factory\Nbe the one to be paid?
Dialogue: 0,0:06:21.84,0:06:24.76,Default,,0000,0000,0000,,Should the person\Ngetting the flu shot be paid,
Dialogue: 0,0:06:24.76,0:06:28.59,Default,,0000,0000,0000,,or should the person not getting\Nthe flu shot have to pay?
Dialogue: 0,0:06:29.10,0:06:32.85,Default,,0000,0000,0000,,The rights here are uncertain,\Nand unclear, and again,
Dialogue: 0,0:06:32.85,0:06:36.22,Default,,0000,0000,0000,,that's also going to make\Ncoming to a market agreement
Dialogue: 0,0:06:36.22,0:06:38.03,Default,,0000,0000,0000,,difficult to do,
Dialogue: 0,0:06:38.03,0:06:40.55,Default,,0000,0000,0000,,and therefore the market\Nisn't going to solve these types
Dialogue: 0,0:06:40.55,0:06:43.19,Default,,0000,0000,0000,,of externality problems\Nvery easily.
Dialogue: 0,0:06:43.89,0:06:47.40,Default,,0000,0000,0000,,So the conclusion here is\Nthat the market can be efficient
Dialogue: 0,0:06:47.40,0:06:49.57,Default,,0000,0000,0000,,even when there are externalities --
Dialogue: 0,0:06:49.84,0:06:52.00,Default,,0000,0000,0000,,when transactions costs are low
Dialogue: 0,0:06:52.00,0:06:54.42,Default,,0000,0000,0000,,and when property rights\Nare clearly defined.
Dialogue: 0,0:06:54.69,0:06:56.84,Default,,0000,0000,0000,,And in fact\Nthat's the Coase Theorem.
Dialogue: 0,0:06:57.25,0:06:58.88,Default,,0000,0000,0000,,If transactions costs are low
Dialogue: 0,0:06:58.88,0:07:01.37,Default,,0000,0000,0000,,and property rights\Nare clearly defined,
Dialogue: 0,0:07:01.37,0:07:03.41,Default,,0000,0000,0000,,private bargains will ensure
Dialogue: 0,0:07:03.41,0:07:05.86,Default,,0000,0000,0000,,that the market equilibrium\Nis efficient
Dialogue: 0,0:07:05.86,0:07:08.42,Default,,0000,0000,0000,,even if there are externalities.
Dialogue: 0,0:07:08.99,0:07:11.15,Default,,0000,0000,0000,,The conditions\Nfor the Coase Theorem to be met --
Dialogue: 0,0:07:11.15,0:07:13.89,Default,,0000,0000,0000,,low transactions costs\Nand clear property rights --
Dialogue: 0,0:07:14.16,0:07:16.66,Default,,0000,0000,0000,,are in practice often not met.
Dialogue: 0,0:07:17.12,0:07:20.19,Default,,0000,0000,0000,,Even so, however,\Nthe theorem does suggest
Dialogue: 0,0:07:20.19,0:07:22.93,Default,,0000,0000,0000,,an alternative approach\Nto externalities.
Dialogue: 0,0:07:23.19,0:07:26.04,Default,,0000,0000,0000,,We've already looked at\NPigouvian taxes and subsidies,
Dialogue: 0,0:07:26.04,0:07:27.58,Default,,0000,0000,0000,,and command and control.
Dialogue: 0,0:07:27.91,0:07:30.41,Default,,0000,0000,0000,,The Coase Theorem\Nsuggests another solution,
Dialogue: 0,0:07:30.84,0:07:33.92,Default,,0000,0000,0000,,namely the creation of new markets.
Dialogue: 0,0:07:34.40,0:07:38.01,Default,,0000,0000,0000,,If the government\Ncan define property rights
Dialogue: 0,0:07:38.50,0:07:40.58,Default,,0000,0000,0000,,and reduce transactions costs,
Dialogue: 0,0:07:41.11,0:07:45.17,Default,,0000,0000,0000,,then markets can be used\Nto control externality problems.
Dialogue: 0,0:07:45.60,0:07:48.78,Default,,0000,0000,0000,,So the Coase Theorem plus\Na little bit of command and control
Dialogue: 0,0:07:48.78,0:07:52.68,Default,,0000,0000,0000,,in terms of defining property rights\Nand reducing transactions costs,
Dialogue: 0,0:07:52.68,0:07:56.70,Default,,0000,0000,0000,,can create a new form of solution\Nto externality problems.
Dialogue: 0,0:07:56.97,0:08:00.84,Default,,0000,0000,0000,,And in fact tradable permits is\Nwhat we're going to be looking at
Dialogue: 0,0:08:00.84,0:08:02.20,Default,,0000,0000,0000,,in the next talk.
Dialogue: 0,0:08:03.62,0:08:05.15,Default,,0000,0000,0000,,- [Narrator] If you want\Nto test yourself,
Dialogue: 0,0:08:05.15,0:08:06.67,Default,,0000,0000,0000,,click "Practice Questions."
Dialogue: 0,0:08:07.57,0:08:10.90,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click "Next Video."
Dialogue: 0,0:08:11.04,0:08:14.89,Default,,0000,0000,0000,,♪ [music] ♪