The Paper River: A Demonstration of Externalities and Coase' s Theorem

It is necessary to know whether the dama ging business is lia ble or not for damage caused since without the esta blishment of this initial delimitation of rights there can be no market transactions to transfer and recombine them. But the ultimate result (which maximises the value of production) is independent of the le gal position if the pricing system is assumed to work without cost. R. H. Coase The Paper River is a cl a s s room simu l ation designed to examine a negat ive ex t e rnality ge n e rated by a pro d u c t ive process that elicits a Coasian solution. Pre v i o u s ex p e riments designed by Hazlett (1995), N u gent (1993, 1 9 9 7 ) , and Berg s t rom and Miller (1997, 179‐99) focus on how pollution emission rights can be effi c i e n t l y a l l o c ated by the market through pro p e rty rights. Although these ex p e riments touch on pro p e rty rights in demonstrating how emission rights are a more efficient means of reducing pollution than gove rnment imposed limits, t h ey do not add ress Coase’s Th e o rem dire c t ly. Classroom ex p e riments that demonstrate Coase’s T h e o re m i n clude those by Delemeester and Neral (1995, 115‐19) and Stodder (1996). In these activ i t i e s , students imagine they are either the cr e ator or recipient of a h y p othetical ex t e rn a l i t y. Although this ap p ro a ch is useful for conveying Coase’s T h e ore m , it does not give students the opportunity to g e n e rate and ex p e rience the ex t e rnality dire c t ly. In the Paper Rive r, students cre ate and ex p e rience an ex t e rnality fi rs t hand and then concep t u a l i ze a correction pro c e d u re that is consistent with Coase’s Th e o rem. The unique nat u re of this simu l ation allows students to be invo l ve d d i re c t l y in the ex t e rn a l i t y . In add i t i o n , it simu l ates an actual env i ronmental pro bl e m , wh i ch will enable students to identify more easily other examples of e x t e rnalities that affect our society, s u ch as endange red species, d e s t ruction of the ra i nfo re s t s , and pre s e rvation of nat u ral hab i t at s .