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Wednesday, October 20, 2004

Lessig on Coase
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After reading Larry Lessig's article on "Coase's First Question" in the current issue of Regulation, I finally understand the argument that the commons proponents have been making. A commons for goods such as spectrum and broadband is the same as free trade, and we all know that free trade is a good thing. Q.E.D.

Lessig's article--which is a comment on Bruce Owen's very good discussion of "net neutrality" in a property rights context in the Summer 2004 Regulation--illustrates the pitfalls of practicing economics without a license. (Owen's article is a short version of the paper Bruce and Greg Rosston presented at PFF's Net Neutrality conference last year, which will be included in our forthcoming conference volume.)

Citing Coase's famous 1959 Journal of Law and Economics article on the FCC, Lessig argues that "proper-Coaseans" first ask the question of whether the resource in question should be the subject of property at all, before asking where the property right should reside. This is in contrast to "property-Coaseans" (e.g., Owen), who go straight to the second question.

Clever language aside, Lessig's "proper-Coasian" concept is based on quoting Coase out of context. As Lessig indicates, Coase did write, "All property rights interfere with the ability to use resources. What has to be insured is that the gain from interference more than offsets the harm it produces." But, the point he was making (yes, I did go back and reread it) was that once property rights are defined, the market can bring about an optimum utilization of those rights and that, in the context of spectrum, the optimum interference, e.g., between operators on adjacent frequencies, is not necessarily zero. He was not suggesting the need to subject every property rights decision to an ex ante cost-benefit analysis to determine "whether the resource should be the subject of property at all." That would be a pretty radical notion, indeed.

The free trade argument comes from a 2002 article on spectrum rights by Yochai Benkler--another apostle of the commons approach--that Lessig also quotes. The argument appears to go as follows. The right to trade internationally, like spectrum, is a valuable right. If we were to create a set of tradable international trade rights and auction them off, people might pay a lot of money for them. But we know that this "property system" would interfere with free trade and be inefficient. The same reasoning applies to goods like spectrum and broadband.

Critiquing this argument would be a good question for an undergraduate economics exam. But the central point of the answer is obvious. Creating international trade rights creates an artificial scarcity where no real scarcity exists. This, by definition, is inefficient. In fact, such rights--quotas--have been used to protect domestic industries, with adverse effects on efficiency that are familiar to most economics undergraduates. Spectrum and broadband, on the other hand, really are scarce, which is why they need to be subject to a property-rights regime to be allocated efficiently. Broadband obviously has scarcity value, because it takes lots of real resources--capital and labor--to provide it. We know that spectrum is scarce, at least in the amounts that the government has made available, because it commands very high prices in the market. Q.E.D.

posted by Tom Lenard @ 1:36 PM | Net Neutrality

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