Monday, October 13, 2014

Pareto's Apology

I often think about the Coasian bargaining problem of theft.  Theft is for the most part an extremely socially inefficient way to acquire wealth.

In this example, two guys stole three newspaper machines, which likely cost $250 or more to make, each.  They got a handful of change, maybe $20, tops, and tossed the machines away where they could not be found.

So....the cost is 3x$250 + $20.  The yield is $20.  The owners of the machines would clearly have paid at least $200 not to have them stolen. whom?  Everyone who agrees not to steal the machines?  Of course not, because then the payments would dwarf the benefit.  It was nice of the guy in the example to pay back, not the amount of money he stole ($20) but something closer to the damage that he caused by being a knucklehead.

This was why Tullock included "theft" in the title of his famous paper.  But we don't recognize often enough just how important that is for the study of "voluntary" exchange.  It's a brilliant insight.  Credit to Tullock, even without the Nobel Prize.

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Do you have suggestions on where we could find more examples of this phenomenon?