Art Carden  

Coase on a Plane: My Answer

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Consumer Surplus: An Applicati... Conditional Insight, Unconditi...

Thanks to everyone who offered excellent comments on my last post. Most people were thinking about it the way I do. To recap, here were the questions I someday want to ask on an exam or in a job interview:

Crying babies and loud children are among the common complaints of frequent flyers; indeed, I can say from personal experience that a screaming infant can make for a long flight. Describe the reciprocal nature of the externality. How does the private market internalize the externality? To what extent does the possibility of an upgrade to first class help mitigate the externality? What is the role of reasonable expectations in deciding on a policy? What is the parent's responsibility? What is the responsibility of the other flyers?

My favorite answer was from Finch:

I'm generally in the "crying baby is not an externality" camp. If you want to escape, fly private. Your tickets are cheap because crying babies fly too.

I lean toward "not an externality" for much the same reason: the bundle of rights you purchase with a plane ticket includes the reasonable expectation that there will be a crying baby or two on the plane. Question-by-question, or direction-by-direction:

Describe the reciprocal nature of the externality.

As I told my classes when I taught micro, "it takes two to tango" (NB: one of the drawbacks of teaching principles of macro is that I don't get to teach externalities). There wouldn't be a conflict about rights were it not for the non-baby passengers who are there to hear the noise. That the baby is the source of the problem isn't obvious.

How does the private market internalize the externality?

As Finch put it, "(y)our tickets are cheap because crying babies fly too." The airline--the owner of the space temporarily inhabited by the passengers--presumably capitalizes the likelihood of amenities and disamenities into the price of the ticket. If things get bad enough at the outset, airlines can also ask especially disruptive families to get off the plane.

On long-haul flights with entertainment systems, airlines themselves address the problem by passing out headsets and by providing kids' games as part of the entertainment. Even if you don't have airline-provided entertainment, you can drown out most of the noise with your MP3 player, noise-canceling headphones (which I have yet to buy but which I will probably pick up on my way home), or even simple earplugs. This probably isn't in the fine print on your ticket, but my impression is that airlines assume passengers are the least-cost avoiders of kid-related noise.

In the last few years I've flown Delta, mostly, and I should have Gold status after the first leg of this trip gets processed. I've been amazed with just how good airlines are at price discriminating. The major carriers reward their frequent flyers with better seats on the plane (closer to the front, aisle seats, etc). Gold status will mean complimentary Economy Comfort seating and more first-class upgrades.

It's also worth mentioning that one person's negative externality can be another person's positive externality. Being around other people's kids on planes reminds me of my own, so a little bit of crying is not necessarily a bad thing (do note that this relationship is not linear or strictly positive). Fewer babies on planes would make people who don't like loud kids better off, but at the expense of those who are worse off because they are around fewer cute kids.

To what extent does the possibility of an upgrade to first class help mitigate the externality?

You can drastically decrease the probability that you're seated near a crying infant by paying to fly first class, or by upgrading your ticket with frequent flyer miles.

What is the role of reasonable expectations in deciding on a policy? What is the parent's responsibility? What is the responsibility of the other flyers?

This is where things get really interesting. It's reasonable, for example, to expect that if you fly often enough you will periodically lose the Screaming Kid Lottery. That said, parents have an obvious obligation to other passengers to make sure things don't get out of hand. When we've flown with our kids--who, praise be to God, travel well--we've tried to make sure we have enough stuff to keep them occupied. I take it that part of membership in a functioning society is putting up with the occasional indignity. The occasional loud kid on a plane probably isn't worth getting that upset about.

In a recent LearnLiberty video*, the most excellent Mike Munger--frequent EconTalk guest, regular contributor of essays to the Library of Economics and Liberty, and latex-gloved defender of safety and security--explains how the institutions of civil society can deal with a lot of spillovers:

*-Obligatory (?) disclosure: I have been compensated for appearing in LearnLiberty videos, but I get no payola for mentioning them on this site.


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COMMENTS (27 to date)
Andrew writes:

Just out of curiosity, is it possible to explain away any possible externality in the above fashion?

For instance, switch out a baby crying on a plane for a factory polluting the local water supply.

Proceeding point by point, if you purchase a house within a reasonable distance of a factory, the bundle of rights you purchase when buying the house includes the expectation that the local factory may pollute your water supply.

Regarding the reciprocal nature of the externality, there would not be a conflict of rights if you didn't buy the house and weren't there to suffer from the polluted water.

For the private market internalizing the externality, the price of your house is capitalized to reflect the likelihood of positive and negative amenities, such as a polluted water supply.

Concerning the possibility of upgrading to escape the externality, you could have chosen to live in a nicer area.

To sum up, is it truly the case that the presence of an externality is dependent upon an individual's (or economist's) subjective probability estimate of that event occurring?

Thomas Boyle writes:

Your "you pays your money and takes your chances" argument could be applied to almost any externality in a society. Pollution? It's the price you pay for participating in our society - want to move to Antartica?

Of course screaming babies are an externality. The real question is, why aren't they priced? There are many ways to do it: airlines could offer baby-free flights (valuable on a redeye, not so much on an afternoon party flight); airlines could charge extra for a baby, refundable if the baby is well behaved (the parents are a lower-cost avoider of the problem than the other passengers are - no-one else on the plane can soothe the baby, feed it, change it, or give it baby benadryl); etc.

BTW, I don't travel first class, but if I paid the thousands of dollars to get a night's sleep on a long haul overnight flight and the airline put a screaming baby up there with me, I'd be very upset!

Daublin writes:

It's fishy. Which is of course why Art is raising the example!

Here is an attempt to show why the crying baby is indeed an externality. Suppose instead of a crying baby, the sound was from an accordion player. One of the passengers on the plane paid the person beside them $100 to play some accordion music during the flight. Everyone else on the plane has bleeding ears.

Is the accordion music [sic] an externality? I would think obviously so. So why not the infant? The possible answers are not satisfactory:

1. No money changes hands. However, externality does not require that money changes hands, merely that other parties engage in some transaction.

2. The infant has no self control. Again, does this criterion generalize? Normally I would think that an accidental externality is still an externality. Pollution from a car is considered an externality even if the driver has no reasonable way to prevent it.

andy writes:

To sum up, is it truly the case that the presence of an externality is dependent upon an individual's (or economist's) subjective probability estimate of that event occurring?

It seems to me the argument is rather that I get what I buy. If the contract with the airlines says something like 'there may by crying children on the plane' (or it can be reasonably inferred), than it doesn't matter if it happens every flight or every 1000th flight. It is not an externality, I bought a product with crying children ('a surprise meal..')

On the other hand, I don't enter into any contract with the factory regarding pollution. We could speak about which rights I have, about Coase etc. - but that's a different situation.

Alex Godofsky writes:

Yeah, I agree with the above commenters who don't buy the "not an externality" story. Extending Andrew's post, theft wouldn't be an externality in a high-crime neighborhood.

The fact that screaming babies are reflected in lower ticket prices just shows that some incidence of the externality is on the airline rather than the passengers.

John Thacker writes:

Art:

"I've been amazed with just how good airlines are at price discriminating. The major carriers reward their frequent flyers with better seats on the plane (closer to the front, aisle seats, etc)."

I'm actually a little surprised that they don't price discriminate more, at least the US carriers. The US carriers tend to award frequent flyer status on the basis of miles alone, even on cheap fares, rather than more credit for people who tend to fly more expensive and more profitable (but still coach) fares, even though they have a whole range of carefully distinguished fare buckets within each class of service. Someone who flies a small number of cheap transcontinental flights can spend a lot less (and be less profitable) but have better status than someone who is much more profitable to the airline.

Andrew:

But isn't it the case that even with the polluting factory, people would feel like there's less of a problem if you bought the house knowingly with the factory already there (and polluting), then if you had the house and the factory then showed up and/or started polluting? Most of these things are clearly problems because someone was the current owner when the factory (or crime, etc) first shows up, and that person takes the loss. So the flight still feels a little different.

Alex Godofsky:

Except that airlines don't try to ban infants the way that they do smoking or theaters ban cell phone use, so I'm not sure how much the airlines are losing.

Alex Godofsky writes:

John Thacker:

Except that airlines don't try to ban infants the way that they do smoking or theaters ban cell phone use, so I'm not sure how much the airlines are losing.

Look, the only way no one loses here is if no one actually minds crying babies. The crying baby is pretty much the same as a tax wedge, transaction cost, etc. The immediate incidence is on the other passengers on the plane. Depending on the slope of the supply and demand, the final incidence will be shared in some proportion between the airline and passengers.

Dan Carroll writes:

As someone who has flown with children, airlines do tend to crowd children in the back of the plane, though that is not always possible.

Parents do pay more - the difficulty of getting everyone through the airport and through security limits the frequency of flights, not to mention that children sometimes wig out in hotel rooms.

Externalities are often dealt with through social pressure - parents are embarrassed by a child's poor behavior and work to soothe or calm it.

It is public transportation, after all - you are forced to deal with all kinds of inconveniences, from the close proximity to strangers, to rude passengers, to connections on the other side of the airport (think Atlanta).

John Thacker writes:

Daublin:

The infant has no self control. Again, does this criterion generalize? Normally I would think that an accidental externality is still an externality.

Well, it generalizes for how people view things, for sure. If you had a lot of racist people that couldn't stand sharing a flight with someone with the wrong skin color, people wouldn't blame the people with the wrong skin color for imposing the externality, even though technically that would be an externality.

Look, the only way no one loses here is if no one actually minds crying babies. The crying baby is pretty much the same as a tax wedge, transaction cost, etc.

Only in the same sense that "people who mind crying babies" are pretty much the same as a tax wedge, transaction cost, etc., yes. Either way, the absence of even one competing airline that attempts to forbid crying babies or stronger efforts to prevent them implies that the airlines are not losing a lot of revenue or profit, because there aren't a lot of people who would be willing to travel more or pay more if they could do so without crying babies. The inefficiency of a tax wedge or a transaction cost is measured by how it changes behavior (or prices.) Note that basically all airlines allow lap children for free, rather than charging them a tax, and some airlines have special low fares for young children who *are* occupying a seat. That strongly implies that the airlines aren't losing money with babies (since allowing them makes money from the parents.)

I'm not saying that it necessarily isn't an externality at all, simply that the facts lead one to believe that the airlines aren't bearing much of the cost. As Bryan says in the Encyclopedia, "Economists measure externalities the same way they measure everything else: according to human beings’ willingness to pay." It seems that if there was a high willingness to pay to avoid crying babies, then airlines would go to greater efforts to enable people to avoid them.

Alex Godofsky writes:
Only in the same sense that "people who mind crying babies" are pretty much the same as a tax wedge, transaction cost, etc., yes.

You can get as metaphysical as you want about this, but if Alice shoots Bob then normal human beings generally describe that as Alice imposing on Bob by shooting him, not Bob imposing on Alice by standing in the path of the bullet.

I'm not saying that it necessarily isn't an externality at all, simply that the facts lead one to believe that the airlines aren't bearing much of the cost.

Again, if the airlines aren't bearing the cost then the passengers are. I know the cost exists because I have personally experienced it and found it distinctly unpleasant.

Finch writes:

> Again, if the airlines aren't bearing the cost
> then the passengers are. I know the cost exists
> because I have personally experienced it and
> found it distinctly unpleasant.

Is every unfulfilled desire of yours an externality imposed by someone else?

Context must matter in whether something is judged an externality. If there are contracts in place, if there are customs, if there are reasonable expectations, these things matter. If a New Yorker moves into the neighborhood, there can't be an externality imposed, because there's no reasonable expectation of that exclusion when you bought the house. If he opens an opium den, that's an externality he's imposing.

When you buy the plane ticket, you have a reasonable expectation that there will be crying babies. That affects your demand for the ticket and your willingness to pay, so you pay a little less than you otherwise would. The airline sells a few more seats for a bit less money each. The crying baby is priced into the market.

Thomas Boyle writes:

In Finch's analogy, the well-behaved other passenger is someone moving into the neighborhood.

The screaming baby (or accordion-playing passenger) is the opium den.

It is not good enough to argue that we all know that somebody, somewhere, is going to wind up with an opium den next to them.

The fact that parents of screaming babies feel embarrassment is pretty strong evidence, too, that they know they're imposing on everyone else. Not too many people blush when they realize that they're irritated by someone else's screaming child - not even when they feel sympathy for the poor wee person (who is presumably quite unhappy).

The argument that the externality is already priced is true only in the same sense that the probability of pollution coming to your neighborhood is "already priced". That's a pretty useless interpretation. It's not priced, in the sense in which that term would be useful: passengers cannot avoid screaming children by paying more, nor do parents get charged more for their children's impositions on others.

Parents do have effective means to soothe their babies when needed, means it would be both illegal and socially unacceptable for anyone else to try to use, so clearly it makes sense to steer the price incentives at the parents. And, also, the un-priced alternative of "just don't go" is much cheaper for the parents to implement, than for the whole rest of the plane to implement.

Mr. Econotarian writes:

I have to add that to many a new parent's ears, hearing someone else's baby cry and being able to say "Oh, wait, that's not my baby!" is a feeling of pleasure and liberation (to some extent).

Finch writes:

The important question is whether you could reasonably consider it when selecting the amount you'd pay for the ticket. If it was something you knew about, it's in the price because it lowered your demand, and it's not an externality. You didn't consider the opium den, in fact it's against the rules of the community, but the New Yorker was a reasonable consideration and within the rules, and hence something that affected your demand and is therefore reflected in the price you paid.

Crying babies are allowed on flights. You pay a little less for your ticket because of this, but the mother, who would have driven if she couldn't buy an airplane ticket, now flies, and that is apparently worth it for the airlines. They get a little higher quantity demanded at a little lower price. We can therefore conclude that (1) there is no externality; (2) all three entities (the mom, the other passenger, and the airline) gain a little in this trade.

I'm totally dodging the question of whether airlines are even allowed to exclude children.

R. Jones writes:

You can buy high-quality earplugs like these to block out nearly all noises.

Alex Godofsky writes:

Finch:

The important question is whether you could reasonably consider it when selecting the amount you'd pay for the ticket. If it was something you knew about, it's in the price because it lowered your demand, and it's not an externality.

This is wrong, and I've demonstrated multiple times why it's wrong. It is a cost, and that cost is borne by someone, and if it isn't borne by the passenger (who gets compensated with a reduced fare) then it is necessarily borne by the airline.

An equivalent example: imagine you go to a (for-profit) zoo and shoot one of the animals. This is a pretty clear externality. Maybe it is borne by the zoo customers, who don't get to view the animal; maybe it is borne by the zoo itself, when it has to charge lower prices because it has a less valuable zoo.

Finch writes:

The passenger is compensated by a reduced fare. Am I missing something here? You pay less for airline tickets because you are likely to experience crying babies.

The mom wins; she gets to fly.

The passenger wins; he gets a reduced fair.

The airline wins; they get increased quantity demanded at slightly lower prices.

It's a trade. There are gains to trade.

In your zoo example, there's no real expectation of the shooting, so it can't be priced into a market. That's the question: does the possible externality get priced into a transaction between all the participants in exchange? If it does, it's not an externality. When I buy your used Honda Accord and you give me a used Honda Accord and not a new Ferrari, you didn't impose an externality on me. I got what I expected for a price I agreed to.

Finch writes:

Is probability what you're getting at? The fact that sometimes you pay a little less and _don't_ have to experience a crying baby?

I don't think that materially changes things. If it was conspiratorial, and there was some stalker-mommy trailing you on flights and you didn't know that so it distorted the probabilities you used to calculate the price you are willing to pay, that might be an externality. If the mom broke rules banning children, say, pulling the child out of her hangbag mid-flight, that might be an externality. But if you go on the flight expecting a high probability of crying babies, knowing they are allowed by the ticket you bought, voluntarily, for a reduced price, there's no externality.

Alex Godofsky writes:

Finch:

The passenger is compensated by a reduced fare. Am I missing something here?

Yes, you are missing something that I have pointed out over and over and over. If the passenger gets compensated by a reduced fare, then the incidence of the externality is on the airline. This is the same as if someone snuck onto the airplane and filled it with foul-smelling garbage. The airline might indeed compensate the passengers by giving them a discount - but that doesn't mean the externality went away.

I don't know how much clearer this can get.

The passenger wins; he gets a reduced fair.

No, this isn't a win for the passenger unless the fare reduction is more than would have been necessary to convince him to fly. At the margin, the fare reduction is exactly enough, and past the margin are people who would have flown but for the crying baby. There are people for whom the offered fare reduction is not enough to convince them to fly, even though they otherwise would have, and those people lost the consumer surplus they would have otherwise gained.

In your zoo example, there's no real expectation of the shooting

Irrelevant.

Is probability what you're getting at?

No.

An expected externality is still an externality. In the canonical example with the farmers and the fence and the goats, the damage could easily be anticipated (goats are not that unpredictable) but is still clearly an externality.

Finch writes:

> If the passenger gets compensated by a reduced
> fare, then the incidence of the externality is on
> the airline.

Ahh, this is one thing you're missing. The airline prefers this situation. It chooses to supply more at a slightly lower price. It's a business where scale matters and overheads matter.

The idea that passengers who choose not to fly because the price reduction is not sufficient compensation are hurt by an externality is a little funky. I didn't invent the flying car. Therefore you didn't buy one from me. Did I impose an externality on you?

The idea that everything that is not exactly the way I want it is an externality imposed by someone makes the term meaningless. It's supposed to be a cost incurred on someone who didn't choose to incur it. (or benefit) Here everybody chose to participate, or for that matter not participate, in the trade, fully aware of the costs.

Justin writes:

Replace the airline with a supermarket. I don't like waiting in line behind a crying baby in the super market and I'm willing to pay more for a no-baby supermarket but none are available. Is the crying baby an externality? Just because a business does not offer a product (no-baby supermarkets/airlines) that you think should be offered does not imply an externality.

David Tufte writes:

I loved this, and not because I fly much.

I am a non-Mormon living in a heavily Mormon part of Utah.

Mormon doctrine has the consequence that "tickets are cheap because crying babies fly too", although in fairness to my Mormon friends the religious motivation is more along the lines that everything else is a lot more expensive to god than kids are (a sentiment that Bryan would probably agree with).

Anyway, we went to see "Epic" last night, and were quite disturbed by the number of crying babies and unhappy toddlers brought to the theatre.

And what was the price of the ticket? They were free: we were there at a special showing provided by our dentist as a sign of goodwill towards his patients. The ticket was cheap because crying babies go to the movies too.

Ritwik writes:

"There wouldn't be a conflict about rights were it not for the non-baby passengers who are there to hear the noise. That the baby is the source of the problem isn't obvious"

Sorry, but isn't the entire point of the Coasean solution that the efficient outcome is not affected by the initial distribution of property rights? This seems to imply that the choice of *default* perspective matters, and IIRC, the Coasean contention is that with zero transaction costs, the choice of defaults is irrelevant.

Floccina writes:

It's also worth mentioning that one person's negative externality can be another person's positive externality. Being around other people's kids on planes reminds me of my own, so a little bit of crying is not necessarily a bad thing (do note that this relationship is not linear or strictly positive). Fewer babies on planes would make people who don't like loud kids better off, but at the expense of those who are worse off because they are around fewer cute kids.

I much prefer sitting next to a small child than a large man.

Total writes:
When you buy the plane ticket, you have a reasonable expectation that there will be crying babies

I have no such thing, thanks.

Oh, and do we have actual evidence that airline tickets are lower because babies are allowed on the planes? Not theorizing this-should-be-true, but actual evidence?

Matt Tanous writes:

Flying on a plane with a crying baby is not an externality for one main reason: you are not a third party to the transaction. You are occupying a seat in an aircraft belonging to another person, and they get to decide whether there will be crying babies or not allowed on their plane.

Just as there is no externality if I go over to a friend's house for Thanksgiving, and he puts on the Thanksgiving football game despite the fact that I really hate football, because his other buddies there like it. I have chosen to accept the terms of the use of another's property for some duration of time, and if I don't like those terms, I have every right to refuse.

The problem of the phantom externality disappears the second property rights are defended, and Coase's nonsense is thrown out.

Julien Couvreur writes:

By the way, I just discovered that some restaurants have an "no kids" policy.
Maybe some airlines could follow ;-)

http://consumerist.com/2013/06/12/we-are-shocked-simply-shocked-that-business-is-booming-at-restaurant-with-no-kids-policy

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