The Coase: The Problem Of Social Cost

Introduction

1. “The Problem of Social Cost”, which was published in October 1960, appears to be one of the most important papers written by Ronald Coase. The fundamental principles of this paper were later be referred to as “Coase theorem”. Based on my reading of various articles and papers written in relation to Coase theorem, it is not difficult to discover that the Coase theorem were not interpreted consistently by economists, legal scholars and others. There are quite a few articles and papers written for the purpose of criticising the Coase theorem. For example, Robert Cooter opined that Coase theorem is 'false or a tautology '.

2. Be that as it may, the Coase theorem appears to be one of the most discussed theorem under the law

However, Coase stated that the conflicts between Mr. A and Mr. B and between the confectioner and the doctor in the second scenario can be resolved through a bargaining process. And through the bargaining process, the resources can be allocated efficiently subject to certain assumptions (which are described in Para [ ] below).

8. The rancher and farmer is an example presented by Coase in “The Problem of Social Cost” when explaining the working of the Coase theory. In this example [ insert example ]

9. Through bargaining process, the total output of all the involved parties can be maximised unless the marginal gain of one party is equal to marginal loss of the other.

10. With the Coase theorem, there is no need for government interference to control externalities, such as noise, pollution and etc as the parties involved will be able to reach an optimum solution through bargaining process regardless of the initial allocation of property rights. The working of Coase theorem was well summarised by Donald H. Regan in his paper “The Problem of Social Cost Revisited” as follows:

“That in a world of perfect competition, perfect information, and zero transaction costs, the allocation of resources in the economy will be efficient and will be unaffected by legal rules regarding the initial impact of costs resulting from externalities.” (own emphasis

However, the efficiency to be achieved through bargaining process will only work and is based on certain conditions. The key assumption would be that the transaction cost must be zero.

12. The second condition is that the property rights have to be clearly defined then the agents can reach an efficient allocation by free bargaining. For example, in the case of pollution dispute, the parties are assumed to have full knowledge of pollution impacts for the purpose of bargaining.

13. Donald H. Regan in his paper also stated that the Coase theorem are subject to the following conditions:

(a) in the rancher and farmer example, Coase deals with the case of a single rancher and a single farmer and therefore, Coase’s analysis were not influenced by the behavior of the 2 agents;

(b) only producers (profit-maximizers) are concerned in the coasean example;

(c) Coase supposes that the marginal prejudice is rising with the level of production.

14. In summary, the liability of the party is not a key consideration. for example, in the rancher and farmer example, the key is to ascertain which is the cheapest option and once that is identified, it can benefit both the parties without governmental intervention. We can also label this it as “least cost” method to achieve efficiency. Part 3: Criticisms of Coase