By David Butler
Some weeks back it was announced that Tottenham Hotspur Football Club were free to build a new stadium after Archway Steel, a local business, dropped its legal challenge against the club. The sheet metal manufacturing firm has been in an on-running legal dispute over the redevelopment plans at White Hart Lane. Recently the High Court in England rejected a challenge by Archway Steel over a compulsory land purchase granted to Tottenham. Archway Steel then dropped its legal action and entered negotiations with Tottenham. On the 31st of March Tottenham reached a private deal with Archway Steel.
This is interesting in light of the Coase Theorem. In his famous 1960 article, The Problem of Social Cost, Chicago Economist Ronald Coase provided us with a means to understand an interaction like this. While Coase is credited with this theorem, he didn’t name it and it is not really a theorem per se. The idea can be traced to Adam Smith and a standard bargaining solution in Economics was formalised by John Nash in 1950. In a nutshell what Coase did was make the crucial connection between institutions, transaction costs, and neoclassical theory.
Coase implied that if there was well defined property rights between two parties, such as Tottenham and Archway Steel, and that both could bargain without cost, then the private market would solve the problem. Even though an externality exists (Tottenham imposing costs on a private business) both parties have a shared interest in finding a solution.
The first half of Coase’s 1960 paper suggests that in these incidents resources will be allocated efficiently if negotiations take place, meaning that they cannot be rearranged in another way to make anybody better off while not harming others. He implied that this will happen regardless which side the law is on. Simply put, everyone has their price – Tottenham can pay Archway Steel to keep quiet or Archway Steel can pay to Tottenham to halt their plans. The structure of the law only determines the division of the value. If we take all of our standard assumptions regarding how individuals make choices and how markets operate, bargaining can actually solve the problems - no third party is required.
Of course, Coase then went on to show the essential irrelevance of his argument given that markets are not frictionless and transaction costs associated with bargaining are pervasive. As Professor Steven Medema, an expert in the work of Ronald Coase puts it, the theorem is a ‘logical fiction’ - it is purely intuitive, not amenable to mathematical proof but is logically sound.
Our initial reaction to the Tottenham vs. Archway case is often to look toward the law to see who has the rights. Cases such as this can often be framed as the 'poor little guy'. Thinking about the problem through the Coase theorem gives us an alternative way to reason and shows us how externalities are reciprocal – if Tottenham were prevented from building their new stadium, their utility sure would be diminished too.
Usually the Coase theorem allows us think about world that doesn't exist but in the Tottenham vs Archway case we have a neat real life event to think about the theorem (that's pretty similar to the examples used in the textbooks). For more of this on a similar theme, John Considine recently spoke about the Chicago School of Economics and Chelsea.
Some weeks back it was announced that Tottenham Hotspur Football Club were free to build a new stadium after Archway Steel, a local business, dropped its legal challenge against the club. The sheet metal manufacturing firm has been in an on-running legal dispute over the redevelopment plans at White Hart Lane. Recently the High Court in England rejected a challenge by Archway Steel over a compulsory land purchase granted to Tottenham. Archway Steel then dropped its legal action and entered negotiations with Tottenham. On the 31st of March Tottenham reached a private deal with Archway Steel.
This is interesting in light of the Coase Theorem. In his famous 1960 article, The Problem of Social Cost, Chicago Economist Ronald Coase provided us with a means to understand an interaction like this. While Coase is credited with this theorem, he didn’t name it and it is not really a theorem per se. The idea can be traced to Adam Smith and a standard bargaining solution in Economics was formalised by John Nash in 1950. In a nutshell what Coase did was make the crucial connection between institutions, transaction costs, and neoclassical theory.
Coase implied that if there was well defined property rights between two parties, such as Tottenham and Archway Steel, and that both could bargain without cost, then the private market would solve the problem. Even though an externality exists (Tottenham imposing costs on a private business) both parties have a shared interest in finding a solution.
The first half of Coase’s 1960 paper suggests that in these incidents resources will be allocated efficiently if negotiations take place, meaning that they cannot be rearranged in another way to make anybody better off while not harming others. He implied that this will happen regardless which side the law is on. Simply put, everyone has their price – Tottenham can pay Archway Steel to keep quiet or Archway Steel can pay to Tottenham to halt their plans. The structure of the law only determines the division of the value. If we take all of our standard assumptions regarding how individuals make choices and how markets operate, bargaining can actually solve the problems - no third party is required.
Of course, Coase then went on to show the essential irrelevance of his argument given that markets are not frictionless and transaction costs associated with bargaining are pervasive. As Professor Steven Medema, an expert in the work of Ronald Coase puts it, the theorem is a ‘logical fiction’ - it is purely intuitive, not amenable to mathematical proof but is logically sound.
Our initial reaction to the Tottenham vs. Archway case is often to look toward the law to see who has the rights. Cases such as this can often be framed as the 'poor little guy'. Thinking about the problem through the Coase theorem gives us an alternative way to reason and shows us how externalities are reciprocal – if Tottenham were prevented from building their new stadium, their utility sure would be diminished too.
Usually the Coase theorem allows us think about world that doesn't exist but in the Tottenham vs Archway case we have a neat real life event to think about the theorem (that's pretty similar to the examples used in the textbooks). For more of this on a similar theme, John Considine recently spoke about the Chicago School of Economics and Chelsea.
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