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Coase’s Theorem is frequently applied to the dilemma of environmental pollution, but could this predominate model of New Institutional Economics also apply to Noise Pollution? In the United States, it is common for people to have neighbors hosting a loud party or to be a member of a rock band rehearsing in the family garage. Local noise ordinances emerged to help establish limits where Coase’s theorem may fall short. Who precisely owns the airwaves between you and your neighbor’s homes? Could not the obnoxious riffs from the untalented punk rock band practicing next door also be distributing spillover effects to households further down the block? Soundwaves permeate far beyond a ten-foot radius around a single housing unit.  Most municipalities have ordinances placing limits on the right of your neighbor to butcher classic tracks from Bad Brains

On the 4th of July, a holiday commemorating the American colony becoming a sovereign nation, it is customary for people to purchase fireworks or attend organized events with a fireworks display. There is some overlap between noise complaints and fireworks, but it takes on a different dimension because of the potential for bodily harm and damage to private property. Not everyone is going to be out blasting off roman candles, Avenger missiles, and Black Cat bottle rockets with gusto. For sleeping infants, pets, early risers, and mild-mannered people, such private exhibitions of dazzling pyrotechnics are a nuisance. For military veterans grappling with PTSD, the blasts could conjure up memories of rocket-propelled grenades demolishing buildings and vehicles in Fallujah; which is downright injurious to their mental health. Not everyone is jumping for joy when their neighbors decide to purchase a treasure trove of fireworks every July. There are even negative externalities beyond the decibels of the fireworks detonating; such as potential damage to private property when armature efforts to deploy pyrotechnics go awry. An issue one would hope that homeowner’s insurance can remedy, but there will likely be variance based upon jurisdiction and insurance provider. 

Unlike noise ordinances, laws governing the private use of fireworks are implemented at multiple tiers of government. Including HOA rules, local laws, county laws, and even laws at the state level regulating the purchase, sales, and use of fireworks and related products. For example, Massachusetts is the only state that bars retail firework sales altogether; but many permit the sales of non-aerial varieties of pyrotechnics; however, this does mean that residents of jurisdictions where aerial are prohibited refrain from purchasing them. 

Courtesy of Reader’s Digest.

Since the spillover effects of fireworks extend past an individual property line, laws regulating the use of fireworks clarify the ambiguity. This is not blind deference to legal positivism, but clarification of the use rights of citizens of a specific locality. If an individual plans to relocate to a state with looser firework laws, they should research the state and local laws before moving. In many cases, the states with less stringent fireworks laws tend to lean conservatively (correlating with a lower cost of living and taxes). Those who dislike fireworks may already be compensated through lower cost living, making gains from Coasian bargaining superfluous, per Boudreaux and Meiners:

“… A common example: someone who buys land located near a busy airport should expect to regularly hear noise from airplanes.148 That person’s property right to her land does not include the right to be free of airport noise. In the language of the common law, the person “comes to the nuisance.”149 The price that she pays for this land is discounted to reflect the absence of this particular “stick” in the bundle of rights received when she purchased the land. This price discount reflects the internalization of this landowner of airport spillover effects..” (p.24).

Even if transaction costs are high and the rights violated by shooting off fireworks are unclear, could neighbors still strike private bargains to resolve this conflict? Hypothetically, it is possible, but there is the potential for suboptimal results. It is arduous to gather all the “…relevant agents to the negotiating table..” either due to other neighbors not being aware of any private agreements in the neighborhood or other factors (time, social capital within the community, costs of organizing, and reconciling different preferences) making group bargaining prohibitive. Organizing the community for group bargaining mirrors the collective action problem we see in public policy. If there is no feasible way to represent the preferences of every household, the private agreement misses the mark on Pareto-efficiency. Any broad agreement or rule aimed at achieving social welfare without complete unanimity will fail; will not be achieved (p.72). A bargain between two households to cease all fireworks by 11:00 pm will not work for all residents. Some households would prefer no fireworks; others enjoy the positive externalities of the free pyrotechnics display and would love for it to go on all night. Regardless of the decision made, costs will be placed on at least one household, and it is unlikely to devise rules that will make everyone happy.

Unfortunately, there needs to be an organized authority for rule promulgation and enforcement. A plethora of individual households forming fractured agreements will not mitigate the spillover effects throughout the community. Should this authority by the local or state government? Not necessarily. It is important to remember that group decision-making is subject to institutional scale; management of an individual household is a form of group governance within a minuscule scope. What about the rules regarding the private use of fireworks enacted and enforced by a Homeowners Association?

Many homeowners who reside in HOA communities bemoan the existence of these apolitical governing institutions, but they are more valid than the local city government. By purchasing a home in a specific community, a person consents to the established rules in the HOA charter. A prospective homeowner can easily withdraw consent by acquiring a home in another subdivision if they disagree with the terms of the charter. It is not only the opt-out features of HOAs that make them more legitimate, it is also the degree of impact the constituency has on the decision-making process. There are no formal political parties to muddy the process, and coalitions are inevitable but lack the cohesive strength without an anchoring institutional identity. Public Choice concerns like rent-seeking are impossible to tease out, but lose traction by the increased individual costs in the absence of sustained formal factions. It is also to note that due to the lack of party politics, the elected representatives on the HOA board are held to a narrow set of interests, making it more likely that they will act per the preferences of their fellow residents. With the development of social media, HOA Facebook groups; have been established; these applications provide direct feedback on various issues within the community. The criticism can be ruthless; most residents have no qualms about voting out ineffectual representatives. 

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2 thoughts on “Fireworks, Coase’s Theorem, and HOAs

    1. Good to know. Crap, I guess that was slightly derelict on my part to overlook that. But I do like my own application of Coase’s Theorem; even if it is derivative. For me disputes with neighbors, its a regular occurrence.

      Personal anecdote, there was a time where my neighbor and I did work out an issue via Coasian Bargaining, but that was because the issue only impacted my house. If the spillover reached other homes, such private negations my not be as effective.

      I would surmise, the reason for this is that transactions costs get meddled when dealing with multiple parties. One man’s transaction cost is another’s benefit. A lot of whether or not something is an issue or a benefit is based upon perspective. To Some a neighbor shooting off fireworks would an annoyance; to others it would be free entertainment.

      Liked by 1 person

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