Economics

The controversy over the leasing and settlement of government lands in Texas can be traced back to the Annexation Resolution in 1845, by which Texas was permitted to retain ownership of its public domain. The legislature divided the domain into three classes soldiers or veterans grants (equivalent to several thousands acres), school and university lands (leased land), and railroad grants (served as inducement for rail companies to construct lines from East Texas.

The state created a checkerboard surveying policy to prevent the consolidation of large chunks of land by any group or individual. However, the policy was ineffectual. Many farmers bought land certificates for as little as 16 centsacre or 100 per section. The worse thing was that these farmers grazed their herds both on their lands and the intervening school sectors. Thus, in 1883, the state legislature passed the Land Board Act, which provided for the competitive sale of seven sections of public land to a single person. A policy of leasing land to ranching operations was implemented. Ranchers who had been using these lands refused to pay for the leases or would pay less than four cents an acre a year.

Theoretically, the 1884 solution of the Texas legislature is a CAC-type solution. Suppose that a governing entity sold land to a single owner. The individuals utilizing the land are required to pay leases to the owner. The idea is to equalize social cost to social benefit derived from the use of the land. Mathematically, the relationship can be expressed as Cs  Bs or the social cost is equal to the social benefit. The rational behind this idea is that by disaggregating social cost, that is, by forcing all users to pay for the same social cost, the governing body can control the economic behavior of the users. The CAC solution is a control type solution.

The 1884 solution is not an application of Coase theorem. For one, the formal design of the Coase theorem was only published in 1960 (the first draft was written in 1937). And second, the situation cannot be understood in the vocabulary of this particular theory. The theorem states that when transactions in an externality are possible and that there are no transactions costs, bargaining will lead to an efficient result regardless of who owns the property.

Suppose that there is a two-good economy. The fisherman owns the river while the industrial plant illegally uses the fishermans land for producing steel. The plant throws wastes to the river, affecting the catch of the fisherman. If the fisherman throws the plant out of his property, overall output of that economy (two-good economy) is at the minimal. If the plant wishes to pay the fisherman for its use of the land, the payment is equal to the additional returns of the fisherman (until the additional returns are equal to zero). In this set-up, regardless of who owns the property, the allocation of resources (fish and steel) is efficient.

The case the aim of the 1884 solution was not to find the best possible allocation between certain goods but rather on how to control economic behavior.