In Saratoga, CA, two neighboring families are fighting over a historic Italian stone pine. From an economic point of view, this example is a beautiful depiction of both positive externalities and the work that won Coase the Nobel Prize.
In short, the family who has the pine tree on their property wants to get rid of it, ostensibly because an arborist they hired deemed it “structurally dangerous”, but also perhaps out of a desire to build an RV pad in its place. The neighboring family is fighting the decision to remove the tree because the tree’s canopy provides shade for their house, and a beautiful view for their daughter’s room. This case shows us a great example of a positive externality: the pine tree’s benefits to society include benefits to the neighboring family that are overlooked in personal utility maximization.
To resolve this dispute, we look to the Coase theorem – given low transaction costs, bargaining between the two parties will lead to an efficient outcome. Since the neighboring family loves the tree so much, they could offer to simply buy the property the tree is on from the family that owns it. However, the family that owns the tree wants to use the property for building an RV pad, so this outcome is unlikely to result after bargaining.
The family that wants to cut down the tree also mentioned in a meeting that the cost of cutting down the tree is close to $10,000, and that this choice is being made because their insurance won’t cover the damage the tree could cause if it falls. Another solution, then, is that the neighboring family could also offer to buy insurance on the tree for the other family.
Whatever the solution may be, it should result in the one that maximizes the utility of both parties. If the tree ends up being removed, that implies that the neighboring family’s increase in utility from the shade and beauty of the tree wasn’t enough to encourage them to successfully reach a bargaining outcome that involved saving the tree.
Andrew Jabara 