Grinch

As nice as Seuss's Grinch story is, we can't forget that it's the story told by the victorious Whos a century after the event. And so I told Ira the real story over Christmas. He prefers my version. And so I thought I'd share it with you as well. It's not in Seussean verse; maybe someday.

Recall that in The Lorax, insecure and ill-defined property rights, combined with a rather stupid Onceler and with a Lorax who cared more about grandstanding than about saving the trees, produced an outcome that none of the protagonists would have chosen. If the Onceler weren't an idiot, he'd have scaled back his capital investments to be commensurate with the stock of Truffala trees available. If the Lorax weren't a moralizing jerk, he'd have pointed out to the Onceler that re-planting trees as he went would let him get a return from his physical plant for a much longer period. And if property rights had been secure, either the Lorax could have sued the Onceler for stealing trees or have subsidized a faster replanting rate. 

And so we can see that the Grinch story is a problem of insecure property rights as well: does the Grinch have the right to peace and quiet, or do the Whos down in Whoville have the right to make as much noise as they like? In a Coasean world, it wouldn't matter as they could bargain to a solution. This could even hold in a world of poorly-defined property rights. If the Grinch really valued peace and quiet more than the Whos enjoyed making noise, and nobody knew which party had rights, the Grinch could still be sensible and pay them to stop even if he thought he had the right to peace and quiet. But only if he thought his rights would then be enforced; Seuss doesn't really like letting his characters find the efficient solution anyway*. And so in How the Grinch Stole Christmas, the Grinch isn't able to convince the Whos to stop making noise despite their most likely having come to his nuisance. 

In my version, the Grinch leaves the big noisy city and, after a tedious search, finds the perfect place for his studies: he homesteads a mountain overlooking an empty valley. There, he's able to read and write without interruption. Until the Whos show up and start building a town. The Grinch welcomes them, and tells them how much they'll love the peace and quiet of the place, hoping that they'll take the hint. After the noisy construction finishes, they have a raucous party in celebration. And then another for every holiday after, from Arbor Day to Xylophone Appreciation Day. But the biggest party they saved for Christmas. The Grinch pleaded with them; he was there first, surely they could try to keep the noise down. But they wouldn't. In desperation, he tried to steal Christmas, thinking that might stop them. But it didn't. So he gave up. He returned all their toys and dined with them before packing up his things and going off to find a new quiet place to live. He was there first, and by rights they should have compensated him for his loss, but enforcing the claim was more difficult than just leaving. And so he finally did the efficient thing and left. 

I tell it with a bit more embellishment, but you can fill in your own details.

* In The Zax, the North and South-Going Zaxes surely could have played leap-frog to solve their conundrum; instead, they just stood there until the city grew around them. By contrast, in The Sneetches, Sylvester McMonkey McBean is an entrepreneurial hero who profits by the prejudice of the Sneetches with Stars Upon Thars and the lame mopiness of Those Who Had None Upon Thars - the latter of which ought just to have had their own frankfurter roasts. A pox, or a McMonkey McBean, on both houses.

Update: In Lorax, it's possible to get complete forest decimation as being optimal from the Onceler's point of view, if the Truffala trees grow slowly relative to discount rates. But clearly he erred here given the massive capital investments and his intentions of biggering and biggering and biggering even as he chopped down the last tree. And so I expect decimation here was based on idiocy rather than rational calculation.

Fence in or fence out?

Coase taught us that externalities are two-sided: there can't be an externality if nobody's around to experience it. And so we seek rules that make the lowest cost avoider of the externality be the one to bear the costs.

Today's application: open-plan offices. Canterbury's Department of Economics and Finance is now split between two open-plan barracks among a couple dozen such buildings in a muddy part of campus that once was a running track. Odds are that we'll be in the barracks for the next year and a half, but the right tail on that estimate is thick. They're gutting the old Commerce building looking for any problems in the cement floors (remember, we're still in earthquake-land); we have to entirely vacate that building, with most of our stuff going into long term storage as there's no way that the current facilities have room for everything.

But enough whinging; on with the problem at hand.

We all make noise in the course of our work: taking phone calls, chatting with colleagues, typing exceptionally loudly on a Das Keyboard Ultimate. Initial recommendations were that staff move to a small private room inside the open-plan space for extended phone conversations or chats with colleagues. The alternative is that everyone buy a set of noise-cancelling headphones. I've been pushing for the latter. Wearing headphones is pretty low cost, especially relative to having to run and transfer calls all the time. And everyone has a different idea about how annoying other folks' conversations are; that's more easily solved via the volume knob on a headset than by shushing colleagues. Added benefit: the heavy construction equipment outside provides only a visual distraction. A hundred bucks spent on a good set of headphones puts me into my own little world, open-plan office or not: money very well spent.

Two norms seem to be developing across the two barracks. In my barracks, the micro folks pretty much live and let live. Folks who don't like noise wear headphones (ok, it's just me so far, but folks are only starting to move in), others wear no headphones, and if I'm taking a long phone call, I head for the private room less for my colleagues' benefit than for privacy. In micro, we're basically Coaseans (as is right and proper for any Top-100 Economics Department)

In the pod where the macro, finance, and experimentalists live, a norm of being shushed all the time seems to be emerging. We'll see whether the two-norm equilibrium holds or whether those wacky macro folks see the light. Either could be optimal depending on folks' costs of wearing headsets and folks' noise abatement costs.

Final note: none of this counts as an externality for policy purposes precisely because we expect firms to optimally structure things within their own contractual nexus. The optimising employer will seek that the lowest cost avoider bear the costs and will allow sufficiently disaggregated decisionmaking to allow inter-departmental heterogeneity in different types of cost be reflected in different barracks' solutions.