Of Coase and Cattle

by Pete Geddes

From the always interesting Dan Cole come this very fine, real world introduction to the work of Ronald Coase and his seminal paper, "The Problem of Social Cost."

Arizona is an "open range" state, which means that cattle can roam at will. Ranchers do not have to fence them in (but they are responsible for collecting wandering cattle). Neighbors must fence them out. From a Coasean point of view, roaming cattle and the harm they cause constitutes a joint-cost problem created by both cattle ranchers and neighbors. The chief solution to the problem is for someone to build a fence. The chief question is: who should have to bear the costs of building and maintaining fences. Ultimately, what "open range" laws do, by insulating cattle ranchers from liability (though not as much as the ranchers might believe) for trespassing cattle, is to allocate the costs of fencing out to the neighbors. The fight going on now in Arizona is about changing the law from "fencing out" to "fencing in," which would basically just reallocate the costs to the cattle ranchers. It would not greatly reduce or increase those costs, though it might be the case that one party or another might be marginally more efficient at building and maintaining fences. Coase would argue that the choice between a "fencing out" rule and a "fencing in" rule should be based on a determination of which party - the rancher or the neighbor - can build and maintain fences at the lowest cost.
Read the whole post here.