The recent dustup over the rights of recliners versus the people behind them who get jammed on crowded airplanes tells us a lot about Coase’s analysis of externalities and the perils of having a simplistic Free Market Roolz understanding of economics.
First, to get a flavor of the two sides, read Josh Barro, followed by Damon Darlin, in the New York Times. The question is whether passenger A in the row in front has the right to recline into the kneespace of passenger B in the row behind. Barro invokes Coase: the solution is to have a market. Clearly, the would-be recliner has the property rights in this matter, since the seat is built to allow reclining and flight attendants will enforce this right in the event of a dispute. So turn it into a market, says Barro. If you don’t want me to recline, pay me. If you offer me enough money, I’ll take it and you can keep your few precious inches. Darlin doesn’t question this invocation of Coase, but he says that the technology gives an unfair advantage to the recliner. The playing (sitting?) field is leveled, according to him, if passenger B uses a Knee Defender.
First off, it should be clear that Darlin’s argument is muddled. He would use the Knee Defender but then remove it if the passenger in front objects. In other words, he is not really changing the allocation of property rights, just adding an extra step. First Barro would have to say, “stow your Knee Defender, buster.” Then he can add, “And if you want to stop me from reclining, show me the money.” So we are back to square one.
So how well does Coase work here, actually? At first blush, it looks reasonable. The recliner values the opportunity to recline at a certain level, measurable in cash. The reclinee values freedom from being reclined on at some other level, also measurable in cash. If the first value exceeds the second no deal will be made, and reclining will take place. If the second exceeds the first, a payment will be made and no reclining will be the result. Thus the relative advantages and disadvantages will be weighed, even though they happen to different people, and the seat will tilt only if there is a positive net advantage. Score one for Coase.
Ah, you say, this overlooks the transfer of money itself: the outcome is not only whether the reclining option will be used but also whether rear passengers have to shell out to front ones. Isn’t there a social justice problem? Barro’s answer is that the people who are willing to pay the most to avoid being reclined on are likely to be taller, and taller people make more on average than shorties; thus Coasian payments help redress a pre-existing injustice. Perhaps this was a clumsy attempt at humor, but as economic analysis it’s pretty flimsy. Average height-related income differentials are very small, especially relative to overall income inequalities. (We are talking about minute differences in the mean relative to standard deviations.) Income differences between randomly selected pairs of in-front and behind passengers are unlikely to be attributable to how much seat space they need. (I’m over six feet, but my middling academic salary puts me below almost every business traveler onboard, no matter how short.) A better argument would be that each reclinee is also a potential recliner, either on the current flight or a future one. If a system of payments is adopted, transfers should roughly net out.
The real problem with Coase in this context, however, has to do with the incentive to threaten to recline. Suppose I am indifferent between reclining and not; in other words, the value to me of being able to put my seat back is exactly zero. Does this mean I’ll simply keep my seat upright and avoid all hassles? Not if I’m Homo Economicus, I won’t! No, as soon as I hear that reassuring electronic beep that says takeoff restrictions are ended, I’ll push my seat back as far as it can go and wait for you to make an offer. My incentive is to hold out for as much as you are willing to shell out and then take it.
This is a well-known result in economics, of course. In the classic case of pollution, assigning property rights to the polluter results, in dynamic equilibrium, in more entry of potential polluters and greater payments to them by pollutees relative to the static outcome. (Not every introductory textbook mentions this, but the best ones do.)
Barro provides a useful example of someone whose understanding of Coase extends as far as the wonders of Markets in Everything and then simply stops. We see the same phenomenon in just about every aspect of microeconomics, from the virtue of sweatshops (workers voluntarily take those jobs, no?) to the evils of rent control (deadweight loss! black markets!). More complex considerations that take into account dynamics, interaction effects and the like never intrude. What you end up with is an ideological truncation of economics, and, as the Great Airplane Debate illustrates, it is largely ideology that frames public discourse.