Seminar 2: Ronald Coase

Ronald Coase is the author of some of the seminal work of modern law and economics. His first paper below was written when he was in his twenties, theother paper is the most cited law review articles of all time. You cannot be unaware of this scholarship, but of course we would like to use the session to explore and challenge the contributions.  the format is that we will try and spend equal amounts of time on the two papers by Coase. the paper by Medema is one of many that gauges the significance of Coase’s work.

Reading

Coase ‘The nature of the Firm’ (1937) 4 Economica 386 (LINK TO PAPER)

Coase ‘The Problem of Social Cost’  (1960) 3 Journal of Law and Economics 1 (LINK TO PAPER)

Medema ‘Legal Fiction: The Place of the Coase Theorem in Law and Economics’ (1999) Economics & Philosophy 209

One comment on “Seminar 2: Ronald Coase

  1. Just to follow up on how Coase and Posner woudl handle social costs plus transaction cost scenarios:

    A chocolate manufacturer makes a profit of $10 a day. B is a doctor next door and makes a profit of $20 a day. The vibrations form the chocolate factory make it impossible for the doctor to work. In this setting absent a judgment the doctor would pay the chocolate maker anything between $10 and $19 to stop using the land to make chocolate, so that he can use his land to treat patients. If the courts had awarded an injunction to stop, then the doctor would not have had to pay the chocolate maker. If the courts had assigned the chocolate maker the right to use his property, then the doctor would have bribed him anything between 10 to 19 to stop.
    In all three scenarios the total amount of wealth produced would be the same: $20. The two uses of land are not compatible and it has to be decided what use to put the land.
    Now add a set of transaction costs. What should the courts do, according to Coase and according to Posner?

    According to Coase there is no real answer in the paper. At page 27-8, after summarising the case-law, he seems to say that the courts are making an allocation of resrouces, and he thinks that the judgments appear to compare what would be gained and what would be lost by preventing actions which have harmful effects. Later (p.34) he turns back to this in a different way by suggesting that the task of the economist is to compare the total social product yielded by different arrangements. There is a numerical example at page 33 that exemplifies this. What follows however is not a prescription that it is for judges to act. Of course if judges are to act, then he’d like them to look to the overall wealth effects. However my sense is that his approach is wider: when you have a social cost the answer is to identify how this may be resolved: can one correct the defect in the system without causing greater harm elsewhere? In later writings, Coase seemed to note that his main point was more to identify that the real world is one that has transaction costs and that these matter. There was then, no prescription for how courts should decide. Maybe to simplify (and paraphrasing the Cameron paper linked below) for Coase law helps explain the working of the economic systems.

    In contrast, for Posner the economic insight of the so-called Coase theorem is that economics can teach lawyers how to design the rules of law. In the example above, any allocation that yields $20 is right. Coase would, I think, respond that this is partly true but it is not all there is to it. It may well be that in a classroom example like that one above we can tell that the right answer is to mimic the market, but in the real world mimicking the market here will lead to effects elsewhere and all need to be factored in. that is Coase’s point was more about thinking about the barriers to solving the problem of social cost, than about working out how to solve it in each case.

    For a couple of interesting links
    http://www.freewebs.com/alancameron/COASE.pdf
    http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1991/coase-lecture.html

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