Notes on the Problem of Social Cost
Ronald Coase
[The following quotes are from the chapter entitled "Notes
on the Problem of Social Cost", which summarizes the debate since
his original 1960 article, "The Problem of Social Cost" (the
original article was in The Journal of Law and Economics, Oct.
1960, 3, 1-44; and the article is also reprinted in the same book).
Posted to land-theory May 1999 by Mike O'Mara.]
[the] Coase theorem]:
"The world of zero transaction costs has often been described as
a Coasian world. Nothing could be further from the truth. It is the
world of modern economic theory, one which I was hoping to persuade
economists to leave. What I did in
The Problem of Social Costs was simply to bring to light some
of its properties. ... Economists, following Pigou whose work has
dominated thought in this area, have consequently been engaged in an
attempt to explain why there were divergences between private and
social costs and what should be done about it, using a theory in which
private and social costs were necessarily always equal. It is
therefore hardly surprising that the conclusions reached were often
incorrect. The reason why economists went wrong was that their
theoretical system did not take into account a factor which is
essential if one wishes to analyze the effect of a change in the law
on the allocation of resources. The missing factor is the existence of
transaction costs.
"... However, once transaction costs are taken into account,
many of these measures will not be undertaken because making the
contractual arrangements necessary to bring them into existence would
cost more than the gain they make possible." (pp. 174-5)
"... The same approach which, with zero transaction costs,
demonstrates that the allocation of resources remains the same
whatever the legal position, also shows that, with positive
transaction costs, the law plays a crucial role in determining how
resources are used." (p 178)
"Even those sympathetic to my point of view have often
misunderstood my argument, a result of which I ascribe to the
extraordinary hold which Pigou's approach has had on the minds of
modern economists." (p.159)
Ownership Rights and Distribution Results
"Whether a difference in the law will affect the allocation of
resources is not so easily settled in the case of previously
unrecognized rights. Different criteria for assigning ownership of
these rights would seem in this case to lead inevitably to a different
distribution of wealth. It might be argued, of course, that since,
with zero transaction costs, it costs nothing to make a contract more
elaborate, all contingencies will be provided for and therefore no
redistribution of wealth could occur. But it would be unreasonable to
assume that people could include in contract a reference to rights of
which they were unable to conceive. ... [b]ut, apart from such
cataclysmic events as the abolition of slavery, these effects will
normally be so insignificant that they can be safely neglected."
(pp.173-4)
Comment by Mike O'Mara:
His conclusion seems reasonable, since Georgists agree that if the
law was changed to introduce Georgist land rights, it would be as
dramatic a change in rights as was the abolition of slavery.
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