Economics in Curb Your Enthusiasm: Property Rights and the Coase Theorem
An annoying power line teaches us about property rights, externalities, and a Nobel-Prize winning economist's discovery
Curb Your Enthusiasm is in its 12th and final season this year. The series is funny, entertaining, and shows real-life situations … sort of. Many of these situations, naturally, provide economic lessons. Each week during Curb Your Enthusiasm’s final season, I will be discussing an economic lesson from the series and provide a video where you can watch the clips and learn a bit more.
What Happened in This Episode?
Today we go all the way back to season 1. In the episode titled “The Wire,” Larry and Cheryl David have a power line that disrupts the view from their backyard, and, naturally, they find it annoying. They would like to move the power line out of sight but need their neighbors’ permission to be able to bury it underground. Presumably, this is because the neighbors must agree to have the powerline be placed under their property as well. Most neighbors sign off right away, but one couple wants something in return – to meet Julia Louis-Dreyfus. Here, we can learn a key lesson about the importance of private property, the rule of law, externalities, and the Coase Theorem.
Why is this wire considered an externality?
First, the wire affecting the David’s view is what economists call an externality. An externality is a side effect of a transaction that affects a third party. In the episode, many neighbors seemingly have their power brought to them by the power company through overhead wires that don’t impact their well-being or view. But that wire negatively affects Larry and Cheryl David’s well-being.
When there is a negative externality, sometimes government regulations are proposed as a solution. But often, it’s not the best solution. This is because while a negative externality is often called a “market failure,” we know that governments fail all the time. There is no guarantee that a government action to “help” won’t be worse than the original market failure.
What is the Coase Theorem?
While there are rare instances when the government can make things better by intervening, the Coase Theorem shows us there are alternatives. In this case, property rights were well defined, and there was a good rule of law in place. So, what happens when somebody is annoyed by the external power line, like Larry David? Well, this is where the Coase Theorem matters. Nobel Prize winning economist Ronald Coase showed an optimal outcome should occur even where there are conflicts between individuals or groups. The only conditions needed are no transaction costs and competitive markets.
This is a powerful result. First, let’s acknowledge that the assumption of no transaction costs is unrealistic. However, markets can often have transaction costs that are low enough and markets that are competitive enough where the market will do a far better job than if the government handles it.
So, what happens in the episode? Precisely what the Coase Theorem would predict. Larry and Cheryl negotiate with the neighbors. The Davids want the power line buried, and the neighbors want to meet Julia Louis-Dreyfus. If the cost of Larry getting Julia Louis-Dreyfus to make an appearance is lower than the cost of them enduring the annoying power line, they’d come to an agreement. If the neighbors value seeing Julia as worth more than the annoyance/danger/etc. of a buried powerline, they would also agree to it. An agreement takes place without a government that is socially optimal! This is what the Coase Theorem predicts.
David Henderson explains another example:
Economists before Coase of virtually all political persuasions had accepted British economist Arthur Pigou’s idea that if, say, a cattle rancher’s cows destroy his neighboring farmer’s crops, the government should stop the rancher from letting his cattle roam free or should at least tax him for doing so.
Coase challenged the accepted view. He pointed out that if the rancher had no legal liability for destroying the farmer’s crops and if transaction costs were zero, the farmer could come to a mutually beneficial agreement with the rancher under which the farmer paid the rancher to cut back on his herd of cattle. This would happen, argued Coase, if the damage from additional cattle exceeded the rancher’s net returns on these cattle.
Now, in the episode itself, all sorts of weird things happen, which is part of the fun of the show. But the episode provides a great example of why government intervention might often be unnecessary to deal with externalities – it shows the Coase Theorem in action!