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Home / Opinion / Coal allocation: lessons from Ronald Coase

When it comes to the allocation of scarce resources, the role of rationing can be thrust either on the government or on the market. The former carries the imminent risk of corruption, as politicians in control of the resources use it to serve their personal or political ends; all the while, economic efficiency takes a backseat. On the other hand, the market means of resource allocation—wherein resources are privately owned and allocated based on market demand—assures economic efficiency.

The issue of coal allocation in India today is similar to that of the allocation of radio spectrum in the US in the previous century. Traditionally, radio spectrum was considered a common resource that just could not be left to the whims of the market. Of course, then, the government was to dictate spectrum allocation to serve the common good. What resulted was the allocation of spectrum according to political ends, apart from the classic tragedy of the commons due to spectrum overuse.

How an economy could operate completely through private means had been explored as early as the 19th century by the likes of Gustave de Molinari and Lysander Spooner. But in the economics mainstream, the phony justification for state intervention even in something as basic as the allocation of radio spectrum was convincingly overturned only as late as 1959 by Nobel laureate Ronald Coase in his seminal paper “Federal Communications Commission" (FCC).

Coase argued that the radio spectrum was as scarce a resource as many other goods in the wider economy, and privatizing it—or at least leasing rights to access through competitive bidding—can achieve efficient allocation of spectrum while preventing political favouritism.

But policy-makers of the time could just not fathom the possibility of private ownership of spectrum, so much so that one commented, “I know of no country on the face of the globe—except for a few corrupt Latin American dictatorships—where the ‘sale’ of the spectrum could even be seriously proposed." The FCC would finally accept Coase’s recommendation decades later, so would many other countries that later resorted to the auctioning of spectrum.

While auctioning is a better alternative compared to direct political allocation, it still does not cut the possibility of rent-seeking by politicians and bureaucrats. There could be no better evidence to this than the coal scam or even the 2G spectrum scam where control of these resources allowed politicians to pocket lucrative sums. This is not to say the initial process of privatization of resources would be free from rent-seeking, but the transfer of ownership to private hands would at least end political control of resources once and for all.

From this perspective, the Supreme Court’s (SC’s) decision represents a major blunder. While coming down hard on the arbitrary allocation of coal blocks, the SC observed that the central government has the right to ownership over coal mines. That is, coal mines will continue be a “national resource" that needs to be protected from the greed of private businessmen, and used to serve the common good. Of course, who could do this better than politicians or an “independent" regulatory body?

Political control of resources is simply recipe for more corruption and further economic loss as the country’s coal mines continue to remain locked away from commercial use. Unless “national resources" are privatized, the inefficient status quo will continue to remain.

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