Chapter 17: Coase and Demsetz on property rights: the case of radio spectrum
Ronald Coase’s pioneering 1959 essay, ‘The Federal Communications Commission,’ presaged his seminal ‘The Problem of Social Cost,’ and was, in fact, my preferred version of it. In it, Coase worked through the problem of allocating an economic resource where natural borders were not obvious. The resource was relatively new – radio spectrum was shown to be a productive input about 1895 – and mysterious. For decades it was called ‘the ether.’ It was soon realized that the emissions of one radio station could interfere with the reception of listeners to another. Conventional wisdom coalesced around the view that chaos, a ‘cacophony of competing voices,’ would ensue in broadcasting were radio transmissions not centrally managed. Coase recognized the claim, which mirrored ‘market failure’ arguments elsewhere. The private use of resources was said to result in endemic, counter-productive spillovers because decision makers did not fully account for the consequences of their actions. The response, crafted by economic theorists and adopted by policy makers, was either to adjust prices (with taxes or subsidies) to reflect externalities, or impose direct government regulation. These instruments augmented or replaced decentralized choices. Coase (1959) accepted that inefficiencies would ensue in wireless under anarchy. But he grasped the limitations of that empirical reality, which simply implied scarcity. Orderly resource rationing was essential. Coase saw central control to be one means to that end, but also saw that there were others. In particular, private property rights in frequencies could be defined and then assigned to private agents.
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