Let us use a simple and well used example of Coase.
1. A railroad has a right of way across farm land. Let us assume that as a train goes across the land it sends off sparks.
2. The farmer has given a right of way to allow the tracks to be built but the right of way has no other conditions other then for say $1, and the railroad can then build the tracks and use them.
3. Now the farmer grows acres of corn and wheat. It is harvest time and the crops are dry but well developed and ready to be harvested.
4. A train comes along the tracks spitting out sparks. It sets the fields afire and the farmer looses all his crops.
How can this problem be dealt with.
For Coase there are two options:
1. The State, whatever that is could pass a law mandating how this is to be treated in all cases. The EPA and OSHA are examples of such agencies.
2. Assuming zero litigation costs, whenever such an occurrence happens the parties go to Court and litigate. Let the Courts decide. This is the Common Law approach.
Coase alleges that the second way is always cheaper. That is assuming zero litigation costs.
Now there is a third way in which one could have dealt with this; namely contractual. In the easement or right of way agreement there should be some negotiated and agreed to remedy for direct and indirect harms. A good attorney would have crafted such.
Now in the airline seat case there are, as I had indicated, two levels of rights; "property" right to a seat and a legal right not to be assaulted, which is a criminal issue not a civil one.
Now Mankiw appears to applaud their application to property rights but fails to understand, apparently, the right not to be physically harmed. This I find is common amongst Economists, a certain tunnel vision of self justifying assertions. The real issue here is not a property right, even in the Coasian sense, but the right not to be harmed, assaulted, by another party.
Now let me go back to Coase and the Farmer. Let us assume that the train set off sparks, the corn went afire but this time the farmer was in the field. He get burned to death, a criminal act perhaps, reckless indifference. Here we have two distinct effects. One is a simple Coase quid pro quo. Sparks and burnt corn. If that were the case then the Farmer could have bought an insurance policy and factored the cost into the right of way. The no matter what both parties would be happy. That is a nice application of Coase. A fried Farmer now is a different story. That now requires, no demands, State intervention.
Let us then return to the airline seat. Yes, I could pay the inconsiderate character in front of me not to swing his seat back, if one were to agree to such an unencumbered property right. Yet there is a second set of issues here, my separated patella, the pain and resulting disability. I could then enter into an agreement with this character in the front seat not to file criminal charges. That is a second Coasian transaction. You see, there are two distinct actions and thus two distinct transactions.
Unfortunately that would not apply in the fried Farmer case, we hope.
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