The Coase Theorem

I'm back. Never thought I could be that occupied and blogging could become such a burden. The hectic routine finally comes to the end and here we are again!

Our Microeconomics textbook ends with a chapter of Market Failure with a small section of Coase Theorem. What fascinated me was the theory is derived from the law case Sturges v Bridgman (1879).

Sturges is a doctor who moved house and built a shed in his garden to carry out his private practice. Bridgman, Sturges' neighbor, is a confectioner who produce sweets in the kitchen for many year before the doctor moved in. Sturges alleged that the noise of the confectioner grinding affected his practice as a doctor and became a negative externality to the neighborhood.

What the court decides was the foundation of Coase theorem where Bridgman can only continue grinding by paying off the doctor's loss. The case can actually be settled via private bargaining. It is conditioned with low transaction costs and clearly defined property rights.

So the Coase theorem states that if property rights are well defined and transactions costs are low, private parties can internalize an externality.

Where:

1) Property rights establish the legal owner of a resource and specify the ways in which the resource may be used. 2) Transactions costs are the costs of "doing business", relating to: time, communication, etc. 3) Internalizing an externality is when the (marginal) social and private costs/benefits are brought together.

Screenshot from HBO's miniseries Chernobyl

Since Coase, economist try to valuate the cost of externality. Sometimes it leads the way and sometimes it does not.

In the case of Austria, the country is surrounded by countries that operate a total of 41 nuclear plants. "Two of these plants, located just 35 miles from the Austrian border with Slovakia, share important design features with the ill-fated Chernobyl plant that in 1986 experienced the worst nuclear accident in history.

Given the light of Coase theorem, Austrian officials offered in January 1991 to provide Slovakia with free electric power as an inducement to shut down the two Soviet-designed reactors. Austrian Economics Minister Wolfgang Scheussel estimated that the cost of the replacement power would be about $350 million annually. Czech Premier Marian Calfa expressed interest in the Austrian offer and pledged that a working group would study it. But no agreement was ever reached to implement it. As this experience illustrates, the costs of negotiation sometimes stand in the way even of agreements that would substantially benefit both parties."

Well if it is the case, transaction cost was what to blame for failure of Coase Theorem in Austria. And has it ever been low?

Reference:

1. Full law case of Sturges v Bridgman: https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=2919&context=penn_law_review

2. Applying the Coase Theorem: http://econpage.com/201/handouts/coase.html

3. Application of Coase Theorem 2: http://www.arrunada.org/Files/T/uom/FRANK%202007%20excerpts%20of%20Ch%2016%20on%20Externalities.pdf

Teach for Vietnam

Yesterday I went to Teach for Vietnam Career Fair. I did not plan to become of one the fellows. Natural curiosity brought me there to learn its model and the difference the program brings to Vietnam.

1. What is Teach for Vietnam (TFV)?

Phuc Huynh (CEO & Founder) was inspired by Teach for America. A frontier in Teach for all network brings quality education to disadvantaged communities. It offers fellowship program to train and pay graduates to teach in rural area.

Fellows have six-week training then head to Tay Ninh to carry responsibilities of full-time English or STEM teacher. The program aims at raising teaching standards and creating a momentum to encourage students to learn and find the joy of learning thanks to its student-centered teaching method. It aims at narrowing the educational gap and provide every student with quality education by 2050.

2. What exciting about the project?

First, it tackles education. Education and health are key for sustainable growth. I believe. Without healthy and educated citizen who can bring the country forward.

Second, it solves problems from both directions: bottom - up and top - down.

+ At student level, kids receive lesson from young and bright fellows who graduate from renowned universities. English and STEM, subjects of future, are taught within TFV scheme. The program also encourages students to apply their knowledge though projects like Little Farmer or sending students to Singapore for STEM competition.

+ At government level, TFV persuades local governments so it can teach at public school DURING SCHOOL TIME. Allowing outsiders to teach in public schools as full-time teachers for two-year is unprecedented in Vietnam. I must give my greatest appreciation to Phuc's determination. Running place to place to persuade this must requires lots of brain cells and sweats. Phuc and team hope to set examples and create a momentum for local government to pay more attention to education and pressure local teachers to change and improve.

Finally, it creates challenges for young graduates. From what I observe, millennials have become pretty ignorant. TFV is the great chance for them to travel their eyes to the unseen. Challenge them to core. Force them to grow.

3. What's the fuss?

I have all the respect to Phuc and his team. The deed is good. They have such compassionate hearts and the heat warmed me inside. However, there are still some points for consideration.

+ Six-week training for fellows might not be enough . They will face tremendous difficulties in disadvantaged area with brand-new role. My friend, who was a fellow and quit the program, said she received little support from back office. She felt like being left alone in a dessert. So, TFV should: (i) improve its support systems for its fellows; and (ii) retrain its fellows when needed. After all, execution is key no matter how exceptional your theory is.

+ Be alert to the teaching quality. I believe fellows can deliver exceptional job in teaching English at secondary level. Yet, teaching STEM is another story. Let alone it is not major of some fellows. Given 70,000 teachers will go surplus in 2020 should we empower existing STEM teachers instead. Should fellows cooperate with them instead of replace them for two year?

+ What's next? After two-year, what awaits these students? Phuc and his team answered that the kids will improve and continue to thrive. Unfavorable externality still awaits. Back to their previous teachers. Who continue to embark the vision of 100% student have access to quality education by 2050? Is it just a rhetorical device?

What next to TFV's fellows? Unlike the UK's Teach First Program or Teach for American. Fellows can not become a certified teachers afterward. TFV does not give fellow broader career choice. It might be a loss to the system when talented potentially-great-teachers can not teach.

I should stop my string of "what if" to remind myself the story of starfish. It goes like this:

---

"A young girl was walking along a beach upon which thousands of starfish had been washed up during a terrible storm. When she came to each starfish, she would pick it up, and throw it back into the ocean. People watched her with amusement.

She had been doing this for some time when a man approached her and said, “Little girl, why are you doing this? Look at this beach! You can’t save all these starfish. You can’t begin to make a difference!”

The girl seemed crushed, suddenly deflated. But after a few moments, she bent down, picked up another starfish, and hurled it as far as she could into the ocean. Then she looked up at the man and replied, “Well, I made a difference to that one!”

The old man looked at the girl inquisitively and thought about what she had done and said. Inspired, he joined the little girl in throwing starfish back into the sea. Soon others joined, and all the starfish were saved."

Adapted from 'The Star Thrower' by Loren C. Eiseley

---

Why you should get married?

Recently, things have been rocky. Piles of unfinished translation and school works coupled with family functions drove me kinda insane. Through tough moments, I realized the importance of family. To have someone love you unconditionally is treasure. In Happiness: A revolution in economics, Frey (2008) found marriage is one of the factors to improve happiness. Which I tend to agree with.

Through economics perspective, marriage increases productivity given better labour allocation between spouses. Higher earning spouse focuses in the production of market goods and service, while his/her partner with lower wage specialized in the production of non-market goods and services. Given love exists, both players in marriage want to increase his/her partner's utility. The transaction cost aka the sacrifice is viewed as lower from both parties leaving family (as an economic unit) with higher productivity (Becker, 1973).

Marriage contract guarantees both parties with better trust acknowledge by the legal system. Comparing to cohabiting couples, married couples tend to invest and plan for future with higher savings in their mutual fund. Jay Zagorsky (2005) found that the wealth of married respondents increased by around 14 percent for each year they were wed.

Finally, the couple also earns economies of scale given their shared usage of car, house, and utility. Marriage also serves as a signal of "better physical and mental health, lower mortality, lower rates of violence, and higher productivity in jobs". Since Spence (1973) views education as a costly "signaling tool", marriage status is becoming a more powerful signal where married people benefit from the assumption made about them.

All in all, in economic terms, marriage is BENEFICIAL. I would love to end my post today by an extract from court ruling over the iconic case of Obergefell v. Hodges (2015):

---

"No union is more profound than marriage, for it embodies the highest ideals of love, fidelity, devotion, sacrifice, and family. In forming a marital union, two people become something greater than once they were."

---

Reference:

1. Becker, Gary S. (1973) “A theory of marriage: part 1”, Journal of Political Economy, 81, 813-846

2. Elizabeth Peters & Claire M. Kamp Dush (2009) "Marriage and Family: Perspectives and Complexities"

3. Kennedy (2015) Opinion of the court, Obergefell v. Hodges (2015):, https://www.oyez.org/cases/2014/14-556