Broadly speaking, the Coase theorem is a famous proposition from law and economics that postulates that conflicting parties will resolve their dispute by striking a mutually beneficial bargain when property rights are well-defined and when the costs of transacting are low relative to the benefits to be gained if the parties transact. (The classic academic example of Coasean bargaining is the cattle trespass problem–see image below.) Now, here’s a real-world question we recently posed in a previous blog post regarding the ongoing Apple iPhone case: why doesn’t the Coase theorem apply to this dispute? That is, why doesn’t the FBI just offer to pay Apple to unlock the password-protected iPhone at the center of this case? After all, both conditions of the Coase theorem are met here: (i) property rights are well-defined (the phone belongs to San Bernardino County, and the owner wants to unlock its phone), and (ii) the costs of transacting appear to be low (there are only two potential transacting parties here–the government and Apple). Nevertheless, instead of Apple and the FBI reaching a mutually beneficial Coasean bargain as the Coase theorem predicts, the FBI has decided to use the courts to compel Apple into unlocking the phone, and instead of capitulating to the feds, Apple has decided to fight them. So, we reiterate our original question: why doesn’t the Coase theorem work here?
Update (2/22): Professor Alex Tabarrok, an economist at George Mason U, wrote back to us earlier today. His thoughtful response to our original Coasean question is as follows: “Maybe the Coase theorem is working and Apple and its users have a higher value on privacy than the government is willing to pay.” In other words, even if the government were willing to compensate Apple for its services, maybe Apple would refuse to accept any offer of compensation from the feds as a matter of principle.
But how much is privacy really worth when public safety is at stake? Doesn’t such a blanket refusal to deal signal a weakness with the Coase theorem?