Skip to main content

Article Summary

Webster, Christopher J., (1998). "Public Choice, Pigouvian and Coasian Planning Theory," Urban Studies 35(1):53-75

This article suggests there may be market solutions to problem of public goods in the form of local collective action outside of government. However, these solutions are likely to work only in settings where there are a small number of participants and high liquidity of property rights. Webster illustrates this by comparing Pigouvian and Coasian economic theory using an example based on land use planning and pollution.

Pigouvian theory begins with the assumption that without any sort of intervention, land and property markets fail in a number of ways because the market will not regulate itself. Therefore, if the social costs of economic activities are not taken into account by suppliers of goods, negative externalities (such as pollution) will be overproduced. Pigouvian theorists propose the internalization of the externalities. Pigouvian analysis calls for intervention, arguing that only government has the authority to force a firm to restrict output, by forcing producers to recognize the social costs of production.

Webster uses the Coasian argument to question the presuppositions of Pigouvian economics and to raise the idea that government intervention may not be the only solutions to the externality problem. The foundation of Coasian economics lies on the belief that voluntary solutions can be found by means of voluntary market agreements.

The polluter can pay the polluted. In this case, the polluter will pay the polluted up till the point at which the revenue she will make is equal to the social cost of pollution.

The polluted can pay the polluter to reduce polluting. The polluter will accept payment as long as the amount offered is less than the (potential) revenue earned.

Externalities are technically eliminated or internalized through a pricing mechanism. Payment from one party to another ensures the socially optimal amount of pollution.

It does not matter who holds property rights (polluter/polluted), the socially optimal outcome will always ensue. Practically, this means that government intervention cannot produce a more efficient allocation of resources than is provided for by voluntary, unrestricted market agreements, regardless of who has rights over land use.

There are a number of assumptions Webster glosses over in his example. A number of assumptions of classical economics need to hold if this voluntary market agreement is going to work, most notably perfect information and zero transaction costs. What Webster terms fungibility, or the liquidity of property rights, becomes important in that property rights may not be that easily transferred. His example assumes that both the source and the effects of the pollution are localized, which may not be the case. Although the outcomes, regardless of who retains property rights, may be quantitatively equivalent, there are qualitative differences that arise. Webster does allow that with the exception of usual circumstances more likely to be found in small settlements, Coasian and public choice analyses of developmental control retain the Pigouvian proposition that government is generally in the best position to organize and deliver collective goods. (16). Government, however, should not act as an agent analogous to the market, as Webster contends. Rather the state (ideally) should act in a way that allows the market to operate freely and produce a socially optimal result.