Question

In 2014, there were three reported disputes between passengers on commercial airplanes over the rights to recline airplane seats, which caused these airplanes to be diverted.48 In one instance, a passenger installed a $21.95 Knee Defender, which prevented the person in front of him from reclining his airline seat. In 2011, prior to these incidents, one journalist wrote that the economics of seat reclining “is a straightforward application of the Coase theorem.”49 What is the Coase Theorem, and why do you suspect it failed to hold in these disputes?

Answer 1

48. This is an application of Coase theorem as a simple transaction cost could be payed to the person who is reclining the seat to stop doing so, to reach an optimal outcome, which is the case of an optimal solution.

49.Coase Theorem states that when there are no transaction costs in a completely competitive market, in presence of externalities, an economic allocation which is optimal is always chosen.

The theorem failed to hold in these disputes because of the endowment effect, i.e. once people possess something, say the power to recline a seat, they would overestimate it's value, and in doing so, it would never result in an optimal resolution where total social product is maximized.