Coase's Theorem of Coase and Cattle

After familiarizing myself with Ronald Coase’s theory of economic efficiencies in economic externalities, I have discovered that Coase’s theorem is greatly debated amongst scholars who study law and economics. I have discovered the two schools of legal thought which are torn apart because of their opinion on the validity of Coase’s theorem. Basically, Ronald Coase declared that when there are no transaction costs, bargaining between neighbors will lead to an efficient outcome, regardless of the laws on property rights. The theorem is saying that when the transaction costs are low and somebody trespasses onto another’s property, in this case, cattle, neighbors are more likely to resolve the dispute by forgiving the trespass or by repaying the trespassed with a small reward. Since he has made it clear that this theory works when transaction costs are low, I agree absolutely with Ronald Coase. Ronald Coase’s theory that, when transaction costs are minimal, bargaining powers of people will result in an efficient outcome is correct.

In Robert Ellickson’s article, Of Coase and Cattle, he mentions a story about Frank Ellis and Larry Brennan. Larry Brennan lost approximately seven tons of baled hay to Frank Ellis’ cattle while they were roaming in open range. Brennan could have taken Ellis to court to reclaim a monetary value of approximately $500, but instead, he decided to notify Ellis of his cows wrongdoing. Ellis offered to give Brennan some of the hay that was baled in his barn, but Brennan declined the offer. Instead, Brennan knew that it would be in his favor in the future to have Ellis indebted to him, incase a situation arises where Brennan would need a favor performed. Since the transaction costs were pretty low and there was close proximity between Brennan and Ellis, the situation was resolved with efficiency. This is pretty common in rural areas since people of the small townships and farming communities live by the motto “live and let live.” The people who repeat this motto know they should put up with small imbalances in their accounts because they perceive that their future interactions will provide adequate opportunities for settling old scores.

The fourth chapter of “Economic Foundations of Law,” by Stephen Spurr, has a great analogy of the Coase theorem that relates it to a Pareto-optimal efficient outcome. The example describes a conflict between a cattle rancher and a farmer who have adjoining properties. Since they have adjoining properties in an open range system, the cattle owned by the rancher are more than likely going to wander around within the farmer’s property—since it is almost impossible to tell which direction or how far cattle are going to migrate in the open range. With the herd of cattle grazing and walking around on the farmer’s crops, the farmer sustains a loss. However, the Coase theorem would make it simple for the farmer and rancher to come to terms and decide a remedy for the farmer’s loss. Stephen Spurr says, on page 67, “The socially optimal number of steers is the number that maximizes total social benefit minus total social cost, that is, the profit to the cattle rancher minus the damage to the farmer.” Essentially, this is saying that damage could be controlled by controlling the amount of head are in a herd of cattle which will in turn reduce transactions costs by reducing the amount the farmer will lose in damaged crops.

From the pair of examples above, it is fairly easy to understand the Coase theorem. However, in Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County, lies a vast story about a dispute between Frank Ellis, a new cattle rancher, and Doug Heinz, another cattle rancher. Since Frank Ellis was in an open range ordinance, he let his huge herd roam free. Ellis’ herd consisted of thousands of head of cattle and his property was approximately 15,300 acres, making it easily the largest farm in Shasta County at the time. Ellis hired a group of Mexican cowboys to take care of his handiwork, which included tending to the herd and doing whatever necessary farm tasks were required. Since his herd was situated on an open range, his cowboys “deliberately crossed the unfenced private lands of others, but also used those lands as free pasture,” as quoted by Ellickson. His exploitation of the laws of the open range sent anger flowing throughout the community, eventually enraging a man named Doug Heinz. Doug Heinz’s farm was situated right next to Ellis’ property, so the two were technically neighbors. While Heinz’s farm was greatly smaller, approximately only 12 acres, Ellis’ herd was always destroying the fence that Heinz constructed in order to keep other cattle off of his land. When Heinz noticed some of Ellis’ cattle breaking through his fence, he decided to call Ellis and complain. To make a story short, Ellis sent a few of his cowboys out to retrieve the cattle. Their method of retrieving the cattle ended up destroying more of Heinz’s fence and damaging even more of the crops. The cowboys took off more quickly than they came and Heinz never saw any sort of repayment for the damage done to his property. This caused Heinz to protest to the county supervisor and round up signatures on a petition to make the area, coincidentally around Ellis’ land, closed range. However, Heinz’s petition to make the region closed range was never passed and Heinz was never rewarded for the damage done to his property and had to suffer from more abuse at the hands of Ellis’ herd. Due to Heinz not receiving just compensation for his trouble, the Coase theorem cannot be applied here. The transaction costs were very high, with most of it coming from the damage done to Heinz’s property, and the rest coming from the time that was spent circulating a petition to close the range. A Pareto-optimal resolution was not reached either, which is why Of Coase and Cattle attempts to explain the flaws in the Coase theorem. However, the author of Of Coase and Cattle does not take into account the transaction costs of the Ellis-Heinz conflict.

The article also discusses conflicts between Traditionalists and Modernists, both of which are styles that ranchers use to take care of their herd. In Shasta County, California, these two neighboring styles are the scene of many conflict and episodes which convert the open range ordinances into closed range. The open range favoring Traditionalists believe their cattle can roam freely without any interruption in the land because they shouldn’t have to fence in their cattle to remain on their property. The Modernists believe exactly the opposite; that ranchers should keep their cattle behind fences to prevent damage to neighboring property owned privately.

The Traditionalists follow the practices of cattle ranching that were predominant in Shasta County in the 1920’s. Traditionalists in the county believe that a rancher shouldn’t fence his property because during the summer months, it would take an inefficient amount of land to make sure a herd as little of 200 cattle would be able to be nourished. Thus, the ranchers would let the cattle roam freely as to find nutrients around the mountainous regions of Shasta County. Just by stating that doesn’t paint the entire picture, though. Traditionalist ranchers purchase grazing leases through the United States Forest Service and the Bureau of Land Management, as well as timber companies. The inefficiency of this is that a Traditionalist with a herd of only 100 cattle would need to lease a forest equal to the area of the city of San Francisco. Traditionalists would also need to construct fences to keep their cattle within the boundaries of the grazing lease areas, but since harsh winter storms and intense summer heat destroy their fences; it’s obvious that the most cost effective way to combat the phenomenon is to not erect a fence.

The Modernists, who are typically younger than typical Traditionalists, see the Traditionalist way of ranching as primitive and out dated. The Modernist view is that their cattle do not belong on other peoples’ property, and vice versa; other peoples’ cattle do not belong on theirs. Not only do they wish to reduce the risk of damage done by their herd on another’s property, they also see it easier to administer nutrients, protect their herd from being impregnated by bulls, protect their herd from predators, and to watch over their herd during the dangerous winter months. The fenced boundaries are more of a sign to “stay out,” which adds privacy and value to the land. However, the cost of fencing off the boundary of an entire property by California’s standards is very costly.

The statute that defines a legal “fence” efficient enough to house cattle calls for three tightly stretched strands of barbed wire stapled to posts situated approximately one rod, or 16 and one half feet, apart. Since Shasta County residents typically use four strands of barbed wire and steel posts instead of cedar, the cost of the fence has gone up. Ellickson gave the quote of the materials necessary to construct a four-strand barbed wire fence in the year 1982 as $2,000 per mile, which doubles if private firms are called in to perform construction. If, for example, Doug Heinz wanted to fence off his property, it would have cost him $18,000 for materials and another $18,000 for labor in the year 1982. A total cost of $36,000 in the year 1982 to enclose one’s own property does not seem as efficient as being able to dedicate some of your time to help your neighbor replant damaged crops. Period maintenance on fences may also prove to be costly, especially in the weather of Shasta County.

The point of comparing Traditionalists to Modernists is summed up by the first story of Ellis and Brennan. Modernists are willing to spend tens of thousands of dollars to make sure they’re investment, which could be the herd of cattle or the rest of their property, is slightly protected. The illusion of safety and security is heavily present in their ideology, which always isn’t the case. Traditionalists believe they could remedy whatever problems arise by offering their assistance in fixing whatever damage takes place, whether it is to re-fence an area of land or to replant crops that were damaged by stampeding herds. It is much more cost effective to live the way of the Traditionalists. However, there are two sides to every story. One could consider Ellis to be a Traditionalist since he let his herd graze in open range. But, since a typical rancher in Shasta County does not have nearly the amount of cattle that Frank Ellis had, we can consider it an anomaly. Ellis caused thousands of dollars of damage and tallied up huge transaction costs in the effort that it took to circulate petitions by both parties, Ellis’ and Heinz’s. Traditionalists can also solely be blamed for provoking Shasta County to enforce closed range policies in different areas.

The stories discussed in Of Coase and Cattle not only prove the Coase theorem to be correct, but also proves Ellickson wrong. Ellickson wanted to prove Coase wrong by performing a tremendous amount of research in a county in California that has its problems when it comes to property law. Ellickson describes many different scenarios, all of which can easily be determined to be efficient or non-efficient. Ellickson simply states that Coase is wrong in his theory, but does not take into account the transaction costs for any of the stories. He may present the costs to each party involved in an incident, but he does not deduct that the costs aren’t necessarily high or low. To break this down further, we can reexamine Ellis versus Heinz and Ellis versus Brennan once more. Ellis versus Heinz was not Pareto-optimal because the transaction costs involved in resolving the incident were extremely high. If transaction costs aren’t defined simply in monetary terms, they could be described as stress and time spent on resolving a situation. In other words, transaction costs could also have the same definition as opportunity costs. Ellis’ herd cost Heinz tens of thousands of dollars that were never repaid, and thousands of dollars to other farmers which were also never repaid. However, the costs don’t end there. Heinz and his allies spent a lot of time, grief, and money to go out and find people to sign his petition to get Ellis’ ranch on a closed range ordinance. Ellis did the same, to spend time to find people to sign a petition to keep his range open. The transaction costs in this example are extremely high since Ellis spent a lot of time and grief in attempt to fight Heinz and vice versa. To make the case even more interesting, Ellis was forced to fence off his land, which didn’t benefit him in the long run. Therefore, the Coase theorem doesn’t apply to this situation. At the same time though, Ellis versus Brennan resulted in an efficient outcome, since Brennan refused to take up Ellis’ offer of replenishing his supply of hay.

There are a few schools of thought who think Coase was wrong in his theory. But, after reading Of Coase and Cattle, it becomes obvious that Ellickson was incorrect in his thesis that Coase was wrong. He is incorrect for a number of reasons, with the main one being that he doesn’t take into account the transaction costs for the conflicts that he reports on. The main element of this paper was about Ellis versus Heinz, which proves that Ellickson was incorrect. When the transaction costs are low, the Coase theorem is 100-percent accurate. Ellis versus Brennan is a good example of that, as well as the quotes from ranchers in Shasta County. “I don’t believe in lawyers [because there are] always hard feelings [when you litigate]” was said by Owen Shellworth, a Shasta County rancher. Another quote, by Tony Morton, states “being good neighbors means no lawsuits.” It is clear that neighbors would be more willing to settle conflicts on their own when the transaction costs are small. However, if the transaction costs are high, as in Heinz’s case, the outcome will be inefficient. Of Coase and Cattle is a great read if you want to learn about property rights, dispute settlements, and the Coase theorem’s application to modern times. Of Coase and Cattle proves that with minimal transaction costs and defined property rights, the Coase theorem is accurate in predicting outcomes.