A simple (quasi) Coasean solution to the EU refugee crisis

Various numbers circulate the Internet about the number of refugees having arrived at the borders of the EU within the last few months. Member States where these refugees enter the EU are seemingly unable to deal with the situation, not least because of the absurdity of various regulations blocking the free movement of people. One of the most widely cited one of these rules is the Dublin Regulation, which enables EU Member State to return asylum seekers to the Member State where the asylum seekers first transited. Therefore instead of a proportionate or random allocation of refugees, the border states of the EU (such as Hungary, Greece, or Italy) claim to carry a disproportionate burden of the refugee influx. Realising this, the best solution Brussels has been able to come up with is a refugee quota for each EU Member State. Here I argue that a simple intra-EU system of trading with the externalities caused by refugees would be a much simpler and fairer solution.

One of the reasons the EU has rules like the Dublin Regulation is because – rather surprisingly to the economist – there is a critical mass of people, who consider refugees as a net negative externality. For example, people often view healthcare or education spending on refugees as a negative externality (surprisingly the same people never consider these as negative externality for the compatriots, here’s more on this).

So what would be the economist’s solution to the refugee crisis in the EU? The short answer is to internalise the externalities. But who would pay for these externalities? The refugee could – through paying taxes – if they were allowed to work but that’s one step ahead.

So here’s a simple proposition: let EU Member States trade the right (or the burden) to host refugees. Take the current situation and assume that refugees within the EU are all genuine asylum seekers and cannot be sent back to their home countries, therefore the question is where to allocate them within the EU. Assume, that EU Member States perceive different levels of negative/positive externalities from hosting refugees. This is a weak assumption; recent news from countries like Germany (committing themselves to a large share of refugees) seems to imply that not all countries regard the costs/benefits of refugees the same.

Take the country where refugees first transited (Country A), which suffers negative externality X from hosting refugees. In this case they would be better off by paying (Xe) to another country for taking the refugees off their hands and thus to avoid the negative externality (e is a random number > 0). Now assume that there is at least one other Member State (Country B) that sees refugees as a negative externality Y (Y < X). If Country B takes the refugees and the payment from Country A, then it suffers a negative externality Y – (Xe). But because Y < X, if e is sufficiently small then this simple transaction would eliminate all externalities. If free trade and bargaining between Member States is allowed then Country B would be able to negotiate a deal with Country A for a sufficiently small e (remember for Country A all that matters is that they do not face the full amount of externality). And if e is not sufficiently small, then Country A would have to find another Member State that perceives negative externalities to be small enough so that transaction takes place.

Of course the devil is in the details but this simple trading system seems a much better and fairer allocation of refugees than the current top-down quota the Brussels is trying to impose. Surely, identifying the magnitude of externalities is non-trivial (if not impossible) task. But so is determining a fair quota.

(Also, note that this system would reward non-myopic countries who see refugees as a blessing rather than a burden. Moreover, countries who see high negative externalities could improve their bargaining position if they start exploring the positive gains that can result from these people – as in this case they would have a smaller amount of negative externalities to offload and pay for to the takers of refugees).

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