The Coase Theorem

Topics: Externality, Market failure, Welfare economics Pages: 3 (861 words) Published: August 18, 2012
The Coase Theorem

In “The Problem of Social Cost,” Ronald Coase introduced a different way of thinking about externalities, private property rights and government intervention. The student will briefly discuss how the Coase Theorem, as it would later become known, provides an alternative to government regulation and provision of services and the importance of private property in his theorem. In his book The Economics of Welfare, Arthur C. Pigou, a British economist, asserted that the existence of externalities, which are benefits conferred or costs imposed on others that are not taken into account by the person taking the action (innocent bystander?), is sufficient justification for government intervention. He advocated subsidies for activities that created positive externalities and, when negative externalities existed, he advocated a tax on such activities to discourage them. (The Concise, n.d.). He asserted that when negative externalities are present, which indicated a divergence between private cost and social cost, the government had a role to tax and/or regulate activities that caused the externality to align the private cost with the social cost (Djerdingen, 2003, p. 2). He advocated that government regulation can enhance efficiency because it can correct imperfections, called “market failures” (McTeer, n.d.). In contrast, Ronald Coase challenged the idea that the government had a role in taking action targeted at the person or persons who “caused” the externality. He believed that government intervention did not necessarily lead to economic efficiency. In fact, it could lead to inefficiency and other/additional externalities. Unlike Pigou’s view of an assigning blame to the person(s) who caused the externality, for Coase, there was reciprocity of harm and that a tort results because, when a conflict arises over resources, all parties can harm each other. In his theorem, Coase states that, assuming no transaction costs, economic efficiency...
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