Chinese economics professor: What to do when you have a stinky neighbour

It was crowded everywhere during the Golden Week holiday. One evening, my family decided to get some small bites at the city square near our house. As soon as we arrived, a pungent odour greeted us. Ah, we spied a new luosifen (螺蛳粉, lit. river snail rice noodles) stall in the food alley.

Liuzhou's luosifen could be called one of the four most foul-smelling foods in the world, together with South Korea's hongeo (fermented skate served sashimi-style), Sweden's surströmming (lightly-salted fermented Baltic Sea herring), and France's blue cheese. Their level of pungency is unique unto themselves. Compared to these greats, the common stinky tofu is not a big deal at all.

I once watched a US television programme about trying exotic foods. One of the episodes was on trying surströmming.

When one makes a beeline away from a stall

Luosifen

Now that a

After my wife almost ran past the luosifen stall, she commented, "Now that the luosifen stall has opened here, the stalls around it selling other items will really suffer! They will definitely lose customers. How unlucky!"　　

The pungent smell from the

After hearing what my wife had to say, I realised that this would be the perfect chance to conduct some economic analysis. I asked her, "Dear, what would you do if you owned the stall beside the one selling

My wife replied, "Well, if the luosifen

We broke out in laughter.

I then asked my elder daughter, "If you were mummy's landlord, what would you do?" She replied nonchalantly, "I would ask the luosifen stall to compensate me!" 　　

I nodded. "You're right," I said. "But whether the

My daughter replied, "Then what do we do? If that happens, aren't the people doing business beside the luosifen stall very unlucky?" She clearly felt that the situation was unfair. 　　

Grin and bear it or pay for it

I said, "Actually, the situation isn't that bad. If you own a small eatery of higher market value beside the luosifen

My wife thought about it and said, "Oh, that makes sense! So if the

I nodded my head excitedly and said, "Wow, my dear! You're so smart! What you've just said is the essence of a famous economics theorem, the Coase theorem? The theorem states that regardless of the allocation of property rights, as long as it is clearly defined and transaction costs are sufficiently low, the optimal value of resources in society will always be realised." 　　

My wife has read my earlier articles on transaction costs. She said, "Yes, what's important is not who owns the property rights, but that transaction costs are sufficiently low. Otherwise, if negotiations break down, no one will want to move, and this would spell trouble."　

Not wanting to miss out on what her parents were talking about, my daughter asked, "What if I opened my eatery first and the stall beside me wanted to sell luosifen? Would the outcome be the same?"　　

I replied, "Yes, it would be the same. Similarly, if you have the right not to be inundated by pungent smells, you can ask your neighbour not to open a stall. If opening a luosifen stall is more profitable, the stallholder can make a deal with you to purchase your rights. If he has the right to open a luosifen stall, and your business value is sufficiently large, you can pay to make him leave or sell something else. So you see, the initial allocation of rights is not that important. As long as a deal can be reached, both stalls would always realise their highest value in society."

Rights first need to be clearly defined

After our little chat, we happily continued to walk around. A while later, it seemed as if my wife had further questions. She asked, "But is the hypothesis of a very low transaction cost too strict? Is it even true that such an allocation of rights exists on this street? Maybe these stalls don't even know what rights they have in the first place!" 　

I was really impressed. Such concepts that nerds like me only understood after poring over countless books have been easily grasped by my wife through daily life.

I composed myself and replied, "That's a good question. Indeed, what Coase truly cared about was precisely the world where transaction costs exist. In fact, there is a transaction system for every kind of transaction costs there is. If rights are not clearly defined, we can be sure that more time and effort would be spent on defining these rights. And these costs should also be included in the transaction costs involved. So the Coase theorem is still pretty clear in saying that regardless of who these rights belong to, they must be clearly defined. If not, transaction fees will never be sufficiently low." 　　

Finding it increasingly difficult to understand me, my daughter still attempted to summarise what I said, "Daddy, in any case, the luosifen stall is still here. This means that for the time being, it must be doing well, and the decrease in value of its surrounding stalls has not caught up with the cost needed to make this luosifen shop move elsewhere. Is that right?"

I nodded, "That's absolutely right! Since the luosifen stall is still here, it proves that under the conditions of transaction costs facing these stallholders, their highest value has already been achieved. Although this value is not the most optimal value in a zero transaction costs market, a world with zero transaction costs has never existed, so who knows what that optimal value is?" 　　

As we talked, we arrived at a BBQ stall and ordered skewers and beer. One hearty meal later, we happily continued our stroll around the night market.

This article was first published in Chinese by Caixin Global as "螺蛳粉店旁的店铺怎么办". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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