I often tell students that Ronald Coase won the economics Nobel for two papers — The problem of social cost (1960), or PSC, and The nature of the firm (1937) — but I had also heard this article mentioned more than a few times. So I acquired a copy (sci-hub ftw!) and got to reading.
The paper has six parts. I will give a short summary of each part before commenting on the paper as a whole.
- The development of government regulation: A lack of regulation of radio spectrum can lead to interference among broadcasters, with the powerful drowning out the weak but most broadcasters interfering with each other. The US Navy (!) attempted to take control over radio spectrum after WWI, but regulation was eventually handed to the FCC in 1934.
- The clash with the doctrine of freedom the press: The First Amendment does not allow censorship of the press but interference among radio broadcasters (and other users of spectrum from everything from TV to mobile phones and wifi) meant that total freedom might lead to chaos. Regulation could prevent chaos, but it could also allow censorship, i.e.,
“Some interpreted the fact that the Commission was denied the power of censorship as meaning that it would not concern itself with programing but would simply act as “the traffic policeman of the ether.” But the Commission maintained — and in this it has been sustained by the courts — that, to decide whether the “public interest, convenience or necessity” would be served by granting or renewing a license, it had to take into account proposed or past programing. One commentator remarked, that by 1949, the “Commission had travelled far from its original role of airwaves traffic policeman. Control over radio had become more than regulation based on technological necessity; it had become regulation of conduct…” [p8, bold added]
The result was that the FCC had the power to choose who got (or maintained) access to valuable spectrum, which gave it significant power. How did the FCC allocate licenses? The popular term among economists is via a “beauty contest” in which various supplicants competed to promise the “most beautiful” use of the spectrum. Such a subjective system can lead to mistakes in allocation, but it can also encourage corruption, i.e., FCC staff deciding based on relationships, favours and bribes.
- The rationale of the present system: [As of 1959], the FCC allocated licenses based on the vague directive of “serving public interest, convenience or necessity.” A judge claimed that FCC regulation was needed because demand exceeded supply. Nonsense, says Coase: Markets resolve scarcity problems all the time. The FCC’s economist (!) argued against prices because markets were not perfect (!) and many users were non-commercial entities such as the military or weather stations. A law student, Leo Herzel, countered with a defence of prices and property rights in spectrum. He pointed out (correctly) that the FCC only needed to create rights that could be auctioned to (and resold among) users. Even further, government entities might “waste” free spectrum. This discussion of creating property rights and then allowing trade to allocate those rights to the party who valued them them most (and thus might be able to put them to the highest and best public use) will be familiar to anyone who has read PSC.
- The pricing system and the allocation of frequencies: Coase uses humor and sarcasm to undermine FCC claims of efficiency (licensing applications could take years to process), honesty (existing radio operators paid nothing for valuable TV spectrum), and accuracy (they could not — as Hayek pointed out — hope to summarise information as well as prices do). This section alone
couldshould crush claims of government advantage in operating or allocating private goods (anything from spectrum to school places to land).
- Private property and the allocation of frequencies: Coase invokes the case of the doctor and candy maker (Sturges v Bridgman) — which appeared one year later in PSC — to explain the value of property rights as well as how trades will occur if willingness-to-pay exceeds willingness-to-accept. He does this to highlight the value of spectrum to those claiming they deserve to get it for free and why radio and TV stations with “free” spectrum are sold for high prices. (Coase also notes that markets in rights should be replaced by regulation if too many participants — and thus transaction costs — make it difficult to make deals. This observation is central to PSC.) This section more or less sets up Coase’s case for auctioning rights as the best way to (a) raise revenue and (b) allocate rights. The FCC didn’t auction spectrum until 1994!
- The present position: Coase summarizes with the recommendation that the government create, sell and enforce property rights in spectrum as a separate step from regulating particular programming. The Public has an interest in promoting and enjoying the highest and best use of scarce spectrum, but the Government (FCC) is not the body to decide such use. That question is best solved with markets in property rights.
My one-handed conclusion is that this paper is interesting for both its contribution to Coase’s PSC and its clear discussion of how and why government regulation can go wrong.