Coase and dorm-room noises

The University of Auckland's halls of residence warn that they might ban students from copulatory activites from 10 pm to 6 am, because of the costs their noise imposes on students in neighbouring rooms.

Ronald Coase reminds us of the reciprocal nature of externalities. Without the ban, active students impose costs on their neighbours. But by implementing the ban, the neighbours impose costs on those who would wish to undertake such activities. Which is best?

And so we have a situation identical to that which obtained in the Economics Department here at Canterbury when we moved to open-plan offices post-quake. No, we don't do that in the offices, despite the apparent productivity benefits. Rather, some of us type loudly and like talking with colleagues while others of us cannot abide noise while working. The Department is split over two buildings. In my building, we fence out the noise by adopting a "wear headphones" norm. This is fortunate both because I do take a few media calls from time to time, and because the Department's administrator is located in our building, and because I have the world's best keyboard. In the other building, they've adopted a shushing norm. I strongly prefer the norm in our building, but nothing stops people from choosing one building or the other as suits their fancy.

When I was an undergraduate in the University of Manitoba's University College dorms, I sadly was not the source of, well, any external noise cost. But rather than wish to shush others or seek to ban their fun out of envy or resentment, I played Bach's Brandenberg Concertos on infinite repeat, loudly, all night, every night. The Concertos still put me to sleep. But I was a Coasean, even though Manitoba's Economics Department didn't much emphasize Coasean approaches: I recognized that the costs to me of averting the costs of the noise were much lower than the costs I could possibly impose on everyone else from banning noisemaking.

Further, Bach was a general-purpose solution: it worked against sex noises, but also against the noise of drunken revelers coming home late from the campus bar. Ban all specific noises as much as you like, but there'll still be noise that happens. It's simply more efficient to encourage people who don't like distracting noises to fence it out with Bach.

I guess the point of all of this is that Auckland students should come to Canterbury instead.

Coming to the nuisance

John Walley has a point. He worries that commercial encroachment on industrial zones is not being treated as a coming to the nuisance but rather could push out the prior industrial firms.

The mobile Nimbys are motivated to perceive these residual problems as significant, using every opportunity to whip up opinion against any previously acceptable use as unacceptable.

In normal times this creates problems, in a disaster recovery situation it becomes a more serious issue. Industry and manufacturing has been a lifeline for our city through our disaster, the sector kept going and, through the efforts of many, maintained activity.

Our disaster has forced our city to become more diverse, more mixed. Different sensitivities have been pushed together and sadly, we have not seen an expansion in the tolerance of established use.

Minor problems become significant when more sensitive people are present to witness them. We all know that dealing with problems becomes all the more challenging when earthquake damage insurance difficulties and weather extremes are in the mix.

The reverse sensitivities in Woolston are not new; noise and smell have always been potential issues, however these existing uses need to be tolerated as many jobs are threatened, being replaced by a handful of hospitality and retail jobs. Does that make any sense? How would you feel if your job was threatened in this way?

The Woolston gelatine plant has generated a gawdawful stench for at least the decade I've lived here.* Rolling up the windows while driving past is pretty standard drill. And it's been worse since the earthquakes.

A few short months after the earthquakes, Cassels & Sons opened their excellent brewpub close to the Woolston plant. It is a glorious place to spend the afternoon when the sun is out and the wind is coming from the right direction; we were there on Sunday. But when the wind isn't right... well, they have a phone number displayed prominently for patrons to call Environment Canterbury with complaints. Cassels are expanding with a large section of retail shops soon to open beside the brewpub.

The gelatine plant clearly pre-dated the retail development. It's also very likely that the gelatine stench predated most of the current owners of the houses just up the road from the plant; they would have bought their properties at a substantial discount reflecting the disamenity. Anyone who bought a house there after the plant was established came to the nuisance as much as did Cassels.

So, it's almost a classic coming-to-the-nuisance case. And, it's also one where there's a strong residual claimant on most of the abatement benefits: the Cassels family. Their brewpub and assorted retail holdings will do rather better when the foul winds cease to blow. In this kind of case, we expect bargaining to efficiency: if it's cheaper for the gelatine plant to change their operations or to move than it is for Cassels to bear the stench, then they can pay the plant to do it. It might have been too hard for the dispersed homeowners to pay the gelatine plant for abatement, but Cassels could pretty easily coordinate things if they wanted a Coasean solution.

But it's a bit more complicated. The gelatin plant may have been breaching some of its emissions consents:

As one of the three air monitoring stations set up in Christchurch by Environment Canterbury (ECan) is directly across the river from Cassels, ECan is well aware of the problem too. As ECan monitoring officer Chris Elsmore explains, there is the odour from gelatine production and there have also been breaches from sulphuric acid production - that would account for the sulphur smell.

"It's at a difficult stage at the moment," Elsmore says.

"Gelita certainly comprehend the problem and are taking significant steps."

But Gelita is working at a different speed to Cassels and others in Woolston, Elsmore says.

But if Cassels aims to have his Tannery complex open in six months, which is his ambition, will the smell have been minimised by then?

"Most likely," Elsmore says. "We're pushing them all the time."

That said, Woolston has long been an industrial area and is where such businesses have traditionally been. Besides Gelita, there is Independent Fisheries, a tannery and, until recently, rubber curing.

"If it was smelling, it was in that area," Elsmore says. "Alasdair's right in that things needed to improve."

So if Gelita is emitting more noxious fumes than they have the right to emit, and if it is more expensive for them to abate down to Code than for Cassels to bear the stench, they could pay Cassels to stop complaining. Cassels is pushing their customers to notify ECan whenever things are too smelly; some of this will be a push for enforcement of existing code while some of it would be to build pressure for reducing the permissible amount of emission.

John Walley has a point where changed neighbouring uses lead to lobbying for changed rules in cases where it would be really simple for the aggrieved neighbours to buy abatement if abatement could efficiently be provided. But where they're instead lobbying for the enforcement of existing standards, and where you can make a pretty reasonable case that any de facto easement existed only because of strong coordination problems among the residential neighbours, perhaps Gelita should be the ones purchasing abatement from Cassels.

* If you're from Winnipeg, think about the Saint Boniface yards from two decades ago.

The House that Spite Built

It would be too quick to say that Coasean stories fall apart when these kinds of cases exist; they could be the sad occasional ex post enforcement that keeps all kinds of other bargains from falling apart. But they do make for interesting cases. But they do make for interesting cases. Via +Courtney Knapp: Spite Houses. Houses built to spite the neighbours.

Mental Floss lists nine of them; the article seems mostly repetition of the Wikipedia page on Spite Houses. Some of the houses seem more example of bloodymindedness than of spite. But the comments thread at Mental Floss provides all kinds of other interesting cases.

Outside of Somerset, Manitoba, near where I grew up, a farmer who had some grudge against a neighbour built a pig barn directly opposite the neighbour's house, his own farmyard being a couple miles down the road. I don't know if it was a fight over churches or local schools, but the targeted family seemed exceptionally unlikely ever to have done anything to anyone that might have warranted such treatment. Spite isn't an edifying motive, but it can be a motive nonetheless.

The more that you think others are motivated by spite, and the less responsive you think spite is to side-payments, the more you want restrictive zoning rules like set-backs.

Air Coase

No matter how much the screaming baby on an airplane annoys you, it really isn't imposing a Pareto-relevant externality. Recall that a Pareto-relevant externality is one where there are gains from trade that fail to obtain. The airline here is residual claimant: if it could earn more by having baby-free flights, or by restricting children to some segments of the airplane, it would do it. Airlines aren't going to throw money away by failing to implement baby-abatement policies if implementing them would earn them higher profits. Absence of baby-abatement airline policies is then evidence that inconvenience imposed on parents by a change in policy outweighs the inconvenience babies impose on other fliers.

Turns out there are two airlines that cater to demand for kid abatement.

Malaysia's two main airline groups have provided a way through the morass by creating kids-free zones in their biggest planes on long-haul routes.

Malaysia Airlines went first in 2011 when it banned kids in first class on its 747s and extended the policy in 2012 when it introduced the superjumbo A380 on twice-daily flights from Kuala Lumpur to London.

The A380 kids policy applies only to the upper deck's tiny economy section of 70 seats behind the 66 seats in business class. However, it's not an outright ban: the airline still has bassinets in the upper deck economy section and will allow kids if there's a kids overflow from the lower deck.

In any case, there are still baby bassinets on the upper deck in business class, so MAS is simply trying to make the upper deck quieter than it otherwise might be.

AirAsia X, which flies from Kuala Lumpur to the Gold Coast, Sydney, Melbourne and Perth and now has an interlocking shareholding with Malaysia Airlines, this month also introduced kids-free "quiet zones" in the forward section of its economy class, where kids under 12 aren't allowed. If you want a seat in the quiet zone, it's offered as an optional extra for which a surcharge applies.

"The airline is not banning kids from travelling, but instead, is enhancing the array of product offerings on board to suit its guests individual needs and preferences," says AirAsia X chief executive Azran Osman-Rani.

I love it when a Coasean-bargaining plan comes together.

There are situations where there are real Pareto-relevant costs imposed on you by other fliers despite the airline being residual claimant: government policy in some countries makes it illegal for airlines to charge heavy fliers more, or to require them to take an extra seat. Governments thereby create market failures by externalising the internality.

Externalising the Internality

In my standard classroom account, a smelly person on the bus next to you isn't imposing an externality, or at least not one that can be relevant for policy. You're both in a contract with the bus company through purchase of the ticket. If the bus company reckoned it would earn more money by restricting bus access to those suitably groomed, they could do so. That they don't means that the losses from doing so exceed the gains - the costs in hassles for the bus drivers and increased time at the stop exceed the costs of lost custom among those who don't like that particular negative lottery ticket. The bus company has an encompassing interest in getting that decision right; they're residual claimant on the surplus.*

But that account is wrong when the bus company can be sued for discrimination. The law can externalise internalities by mucking about with exclusion rights.

L.A. Weekly tells the story of a homeless man who sued MTA for violating his civil rights; they wouldn't let him on the bus because of his appearance. And, from the context of the rest of the story, likely because of his odour. MTA settled for $200,000 in January 2011. In a Coasean world, the bus company could just start paying him not to take the bus. But free entry into the "being unpleasant and not taking the bus" industry would probably make that rather cost-prohibitive.

The rest of the story is well worth reading. Nowell, the man excluded from the bus, used a good chunk of his settlement to take a one-year lease in an apartment building. But because his neighbours were pretty insistent that he take a bath, he consequently refused to take one. So after several months of legal fights, he was evicted. Nobody comes out of the story smelling minty fresh.  The story concludes:

"When I moved in, they made such a huge issue right from the start," he [Nowell] says.

If he cleaned up, they would think he did it because of them.

"It might be a childish way to react, but it also has to do with self-respect. Call it pride, or whatever you want. If they'd just left me alone, let me catch my breath. By them making an issue out of it, none of it happened. Everything went wrong."

Nowell admits there are patterns he's become locked into. "Enough people tell you you're a certain way, a bum, you think, 'I must be that.'  When you're at the bottom of the barrel, everyone feels like they have the right to tell you what to do, where to do it and when. It becomes a reflex action to dig your feet in and say no," he says. 

SB Properties kept his six months' prepaid rent plus double deposit. Now it is going after him for attorney's fees. Nowell estimates he paid his attorney $30,000. He isn't sure. He hasn't been counting the money too closely, except to note that he has less than a quarter of the original settlement left. He is spending much of the rest to appeal the jury verdict.

"Why did they allow me to sign the lease and immediately turn around and spend the next eight months trying to remove me?" he asks, unable to move on.

By the time SB got him out, it was August. The irony — and in this case there are many — is that his lease had only four months left.

Asked if he believes Nowell would have cleaned up on his own, had he just been left alone, SB Properties general manager Yaniv Abiner pauses for a long time, then finally says, "What do you think?"

Nowell, meanwhile, is on the hunt for a new place to live, noting wryly, "A roommate situation isn't going to work for me."

Yesterday, he explains over the phone, he went to see a unit in a downtown artists loft building, hoping that artists would be more understanding. The woman who owned it was waiting out front. She said no the minute she laid eyes on him, adding that he ought to try a halfway house for people on welfare. "I'm not the stereotype you think I am," he admonished her.

He did not wear the new pants. "I'm looking at them right now, in fact," he says.

It has been some time since he last took a bath.

Fixing homelessness seems a bit harder than giving somebody enough money for rent.



* Similarly, Christchurch's Red Bus must reckon that the costs of letting professionals onto the bus with a takeaway cup of coffee exceed the cost of lost custom among my cohort.