The Real Coase Theorems

By Fox, Glenn | The Cato Journal, Fall 2007 | Go to article overview

The Real Coase Theorems


Fox, Glenn, The Cato Journal


The "Coase theorem," in one respect, is a triumph of social science scholarship. Web searches using "Coase theorem" as key words typically yield over 100,000 hits. Economists, legal scholars, environmentalists, and political scientists have written volumes on the theorem. Few ideas written by economists in the 20th century have been as widely debated. And the debating continues, 47 years after the publication of "The Problem of Social Cost" (Coase 1960), the essay recognized as the source of the ideas in question. There is only one problem: Ronald Coase maintains that the theorem that bears his name conveys an idea that is antithetical to the message that he intended.

My view is that virtually all of the criticism of the Coase theorem fails to appreciate the actual message that Coase intended with "Social Cost" and is, therefore, essentially irrelevant. Tragically, because we have focused on what he was not saying, we have not grasped what he was saying. Consequently we have been neither sufficiently appreciative nor sufficiently critical of his actual message.

Coase on the Problem of Social Cost

With the publication of The Firm, the Market and the Law (Coase 1988), a collection of essays which republished "The Problem of Social Cost" and "The Nature of the Finn" and which also included insightful reflections on the legacies of those articles, Coase (1988) broke his protracted silence on the way in which his work had been interpreted by economists, legal scholars, and other social scientists. He contends, "My point of view has not in general commanded assent, nor has my argument, for the most part, been understood." He attributes this lack of understanding to the fact that "most economists have a different way of looking at economic problems and do not share my conception of the nature of our subject" (Coase 1988: 1). Among his specific points of departure from the mainstream, he holds the view that economists' preoccupation with studying the logic of optimal choice has caused them to neglect the study of the institutional setting in which choice takes place and that this has eroded the substance of economic research, that human action cannot be adequately characterized as a constrained optimization problem, and that modern economic theory ignores the role of transaction costs (Coase 1988: 3-7).

Perhaps the most revealing statement that Coase (1988: 13) makes about the theorem that bears his name is the following:

   "The Problem of Social Cost" ... has been widely discussed in the
   economics literature. But its influence on economic analysis has
   been less beneficial than I had hoped. The discussion has largely
   been devoted to sections III and IV of the article and even here
   the discussion has concentrated on the so-called "Coase theorem,"
   neglecting other aspects of the analysis. In sections III and IV, I
   examined what would happen in a world in which transaction costs
   were assumed to be zero. My aim in doing so was not to describe
   what life would be like in such a world but to provide a simple
   setting in which to develop the analysis and, what was even more
   important, to make clear the fundamental role which transaction
   costs do, and should, play in the fashioning of the institutions
   which make up the economic system.

Coase goes on to explain that a world without transaction costs is a peculiar world in which, among other things, firms would not exist (Coase 1988: 14-15). In fact, economic institutions, according to Coase, do not matter in a world without transaction costs.

Many critics of Coase have focused their attack on his apparent neglect of the existence of transaction costs in the real world. But this criticism is misplaced. Coase's discussion of the peculiar unreal world with no transaction costs was intended to draw out the strange implications of perfect competition, which he viewed as the central perspective in modern economic analysis. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Real Coase Theorems
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.