Tuesday, August 26, 2014

The Coase Theorem Fails on a United Flight to Denver

My fellow University of Chicago economists, stop reading Krugman's latest and explain this puzzle to me.  A United Flight to Denver was diverted to Chicago because of a fight between two 48 year olds over whether the person sitting in front in Economy Plus has the right to recline her chair.   For details read this.

As we get ready to start the new academic year, here is an excellent example of the Coase Theorem not working! Who has property rights on an airplane when the person in front of you wants to recline while you care about your knees? Why was this United flight diverted to Chicago? Wasn't that a destruction of resources for everyone involved? My fellow Becker students, what is the answer? You have 10 minutes to answer this 6 point question. The Coase Theorem predicts that the recliner should have paid the person behind her? True, false, uncertain. Explain.

An environmental economist might ask a valuation question here.  In aggregate, on a plane carrying perhaps 150 passengers, what was the total loss to everyone on board (including all of the passenger time lost landing in Chicago and taking off again) and the value of the anxiety caused by this fight between these two people?   Did the two duelers internalize these social costs when their fight began?  Why didn't the victims on the plane pay the duelers to stop dueling?  Or would this create bad incentives encouraging even more fights over common space? The tragedy of the commons is an interesting problem!

Here is some analysis from Time Magazine as it discusses the merits of a product called the knee defender that implicitly grabs the property rights for its backseat owner.

UPDATE:  Yes, I am well aware that the Coase Theorem assumes that property rights are well defined and agreed upon (so some have said that the Coase theorem does not apply here) but what is interesting about this case is that the airline has not established these rules.  It is also interesting that transaction costs precluded the ability of others on the plane to offer their seat to the woman who wanted to recline because this simple solution would have resolved this "crisis".  Nobody gained by landing the plane in Chicago. People lost time, they had to land and takeoff one more time.  The Coase theorem assumes a smooth redistribution of resources but instead resources were destroyed in this multi-player interaction.  This should interest economists.