The Coase Theorem and Planning for Sustainable Development

By Lai, Lawrence Wai-chung; Lorne, Frank T. | The Town Planning Review, January 1, 2006 | Go to article overview

The Coase Theorem and Planning for Sustainable Development


Lai, Lawrence Wai-chung, Lorne, Frank T., The Town Planning Review


This paper discusses the potential contribution and limitations of the Coase Theorem to the theorisation of sustainable development. The Coase Theorem can be manifested in numerous ways beyond the hypothetical example of direct negotiation between the polluters and the pollutees. Sustainable development not only provides a negotiative context, an infrastructure where compensation in the Coasian sense can be made, but also a framework for transforming negative externalities into positive externalities, as illustrated by a real life example from Canada. Central to the framework is a change in the mindsets of parties to a negotiation and Schumpeterian innovations.

The dilemma for economists who argue that rational people look after their own selfinterest is that they are propcigating a self-defeating paradox. The converse of their case is that people - including economists must be irrational if they portray themselves as working for the common good. And if the theories of these economists arise from their own self interests, or their perception of their employers' or clients' interests, why should anyone think such theories will promote or lead to environmental protection? (Beder, 1996. 64)

This passionate statement of Beder is indicative of the misunderstanding of economics by some who do not appreciate that a 'win-win solution' is possible when rational (and selfish in this restricted sense) people voluntarily cooperate. It lends sentimental support to the view that the market, a means of voluntary exchange, always fails to look after the interest of everyone - hence the concept of 'market failure'.

This paper argues that with qualification and modification, the Coase Theorem, as a specific way of modelling transaction costs in the discussion of aspects of market failure, can be applied to a discussion of planning for sustainable development as a desirable and benign human goal through a 'win-win' approach. This approach has been seen as being feasible by such planning theorists as Davoudi (2001), Davoudi and Layard (2001) and Batty (2003). Indeed, it is possible that in the development process, planning practitioners are in effect practising a Coasian principle without fully being aware that it is indeed the theoretical basis for 'environmental modernisation' (Jacobs, 1999) or 'ecological modernisation', the prevailing model for planning institutions in Europe (Batty, 2003).' To appreciate the usefulness and limitations of the Coase Theorem in the enquiry of sustainable development, it is necessary to characterise both the Coase Theorem and sustainable development.

The Coase Theorem and transaction cost analysis

The Coase Theorem and transaction costs are closely related ideas and, indeed, the concept of transaction costs is the cornerstone of the Coase Theorem (Lai, 20053). However, these two ideas have taken separate routes in their application to planning research. The reception of transaction cost economics in the theorisation of town planning as a state activity occurred in the early 19905, as can be discerned from a series of focused works by Alexander (1992), Lai (19943; 1994)3; 1997), and Webster and Lai (2003). These publications all came after Ronald H. Coase who was awarded a Nobel Prize in economic science. The earlier work of Burton (1978) and Willis (1980) that referred to the idea were much more general and contextual.

The Coase Theorem itself has been applied to analytical and empirical analysis of zoning control since as early as the 19708 in work by Fischel (1978; 1979; 1980; 1987) and Siegan (1970). More recent works by Lai (i994b, 49; 1996, 97-141; 1997, 189-90, 240) and Webster and Wu (19993; igggb) have applied the invariant concept of the Coase Theorem to an empirical evaluation of land values and other urban phenomena.

The idea of transaction costs, which may be defined as all costs other than the costs of production, originated from Coase's 1937 paper, 'The Nature of the Firm' (Coase, 1937) in which the firm is explained as an organised means of exchanging the fruits of specialised production that can avoid the costs of exchanging through an unregulated market.

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