In my standard classroom account, a smelly person on the bus next to you isn't imposing an externality, or at least not one that can be relevant for policy. You're both in a contract with the bus company through purchase of the ticket. If the bus company reckoned it would earn more money by restricting bus access to those suitably groomed, they could do so. That they don't means that the losses from doing so exceed the gains - the costs in hassles for the bus drivers and increased time at the stop exceed the costs of lost custom among those who don't like that particular negative lottery ticket. The bus company has an encompassing interest in getting that decision right; they're residual claimant on the surplus.*
But that account is wrong when the bus company can be sued for discrimination. The law can externalise internalities by mucking about with exclusion rights.
L.A. Weekly tells the story
of a homeless man who sued MTA for violating his civil rights; they wouldn't let him on the bus because of his appearance. And, from the context of the rest of the story, likely because of his odour. MTA settled for $200,000 in January 2011. In a Coasean world, the bus company could just start paying him not to take the bus. But free entry into the "being unpleasant and not taking the bus" industry would probably make that rather cost-prohibitive.
The rest of the story is well worth reading. Nowell, the man excluded from the bus, used a good chunk of his settlement to take a one-year lease in an apartment building. But because his neighbours were pretty insistent that he take a bath, he consequently refused to take one. So after several months of legal fights, he was evicted. Nobody comes out of the story smelling minty fresh. The story concludes:
"When I moved in, they made such a huge issue right from the start," he [Nowell] says.
If he cleaned up, they would think he did it because of them.
"It might be a childish way to react, but it also has to do with self-respect. Call it pride, or whatever you want. If they'd just left me alone, let me catch my breath. By them making an issue out of it, none of it happened. Everything went wrong."
Nowell admits there are patterns he's become locked into. "Enough people tell you you're a certain way, a bum, you think, 'I must be that.' When you're at the bottom of the barrel, everyone feels like they have the right to tell you what to do, where to do it and when. It becomes a reflex action to dig your feet in and say no," he says.
SB Properties kept his six months' prepaid rent plus double deposit. Now it is going after him for attorney's fees. Nowell estimates he paid his attorney $30,000. He isn't sure. He hasn't been counting the money too closely, except to note that he has less than a quarter of the original settlement left. He is spending much of the rest to appeal the jury verdict.
"Why did they allow me to sign the lease and immediately turn around and spend the next eight months trying to remove me?" he asks, unable to move on.
By the time SB got him out, it was August. The irony — and in this case there are many — is that his lease had only four months left.
Asked if he believes Nowell would have cleaned up on his own, had he just been left alone, SB Properties general manager Yaniv Abiner pauses for a long time, then finally says, "What do you think?"
Nowell, meanwhile, is on the hunt for a new place to live, noting wryly, "A roommate situation isn't going to work for me."
Yesterday, he explains over the phone, he went to see a unit in a downtown artists loft building, hoping that artists would be more understanding. The woman who owned it was waiting out front. She said no the minute she laid eyes on him, adding that he ought to try a halfway house for people on welfare. "I'm not the stereotype you think I am," he admonished her.
He did not wear the new pants. "I'm looking at them right now, in fact," he says.
It has been some time since he last took a bath.
Fixing homelessness seems a bit harder than giving somebody enough money for rent.
* Similarly, Christchurch's Red Bus must reckon that the costs of letting professionals onto the bus with a takeaway cup of coffee exceed the cost of lost custom among my cohort.