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| | ==The Coase Theorem== | | ==The Coase Theorem== |
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| − | The most-cited article in all of economics<ref name="Coase article">http://www.boston.com/globe/search/stories/nobel/1991/1991i.html</ref> is “The Problem of Social Cost,” published by Professor Ronald H. Coase in 1960. It describes what later became known as the “Coase theorem,” a fundamental conservative insight about entitlements and property rights. Though criticized for thirty years by professors who disliked its implications, this theorem was finally recognized by the 1991 Nobel Prize of Economics, of which Professor Coase was the sole recipient. (An unshared Nobel Prize awarded to only one recipient is rare.) | + | The most-cited article in all of economics<ref name="Coase article">http://www.boston.com/globe/search/stories/nobel/1991/1991i.html</ref> is “The Problem of Social Cost,” published by Professor Ronald H. Coase in 1960. It describes what later became known as the “Coase theorem,” a fundamental conservative insight about entitlements and property rights. Though criticized for thirty years by professors who disliked its implications, this theorem was finally recognized by the 1991 Nobel Prize of Economics, of which Professor Coase was the sole recipient. (An unshared Nobel Prize awarded to only one recipient is rare.) Some oppose this theorem, despite its truth, and economists have even called Professor Coase names in criticism.<ref name="Coase article"/> |
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| − | But few economics courses explain this theorem, and those that do unfortunately teach distorted interpretations of it. Professor Coase himself has endured unfair academic disdain and criticism, including being called a “dinosaur” by one colleague.<ref name="Coase article"/>
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| | ===The Coase Theorem Explained=== | | ===The Coase Theorem Explained=== |
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| − | Like Isaac Newton, who invented calculus in order to do his work on physics, Ronald Coase first invented the new concept of “transaction costs” to lay the groundwork for his insight. As we have explained, “transaction costs” consist of the time, money, and effort someone loses in obtaining what he wants. Law professor Richard Epstein tersely summed up the meaning of “transaction costs” in one word: “friction.”<ref name="Coase article"/> Coase’s Nobel Prize was partly based on his discovery and development of this new concept, and the committee conferring the prize (the Royal Swedish Academy of Sciences) likened this to the discovery of a new set of elementary particles. | + | Like Isaac Newton, who invented calculus in order to do his work on physics, Ronald Coase first invented the new concept of “transaction costs” to lay the groundwork for his insight. As we have explained, “transaction costs” consist of the time, money, and effort someone loses in obtaining what he wants. Law professor Richard Epstein tersely summed up the meaning of “transaction costs” in one word: “friction.”<ref name="Coase article"/> Coase’s Nobel Prize was partly based on his discovery and development of this new concept, and the committee conferring the prize (the Royal Swedish Academy of Sciences) likened this to the discovery of a new set of elementary particles in physics. |
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| | Once “transaction costs” were discovered and described, Coase’s insight became possible. '''''The Coase theorem states that in the absence of transaction costs, an efficient or optimal economic result occurs regardless of who owns the property rights.''''' The free market guarantees the efficient outcome regardless of who owns what, because there are incentives to bargain towards the efficient result until it is achieved. This is true even for activities that generate “negative externalities” (harm to others); freedom to negotiate will enable all affected to bargain towards the most efficient output. | | Once “transaction costs” were discovered and described, Coase’s insight became possible. '''''The Coase theorem states that in the absence of transaction costs, an efficient or optimal economic result occurs regardless of who owns the property rights.''''' The free market guarantees the efficient outcome regardless of who owns what, because there are incentives to bargain towards the efficient result until it is achieved. This is true even for activities that generate “negative externalities” (harm to others); freedom to negotiate will enable all affected to bargain towards the most efficient output. |