Difference between revisions of "Coase theorem"

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The Coase theorem states that if property rights are well-defined and transaction costs (including costs of negotiating) are zero or negligible, then the most efficient or Pareto optimal economic activity will occur regardless of who initially owns the property rights. Negotiation and market transactions will ensure optimal allocation of property.

This simple theorem, first published in a 1960 paper^[1] by Ronald Coase who won the Nobel Prize for Economics in 1991, has powerful implications for economics, law, politics, and even Christianity. The theorem supports conservative interpretations of the Chicago School of Economics.

The implications in law are that the best a judge can do for the economy as a whole is to minimize transaction costs, such as bureaucracy. Court decisions that impose additional procedural obligations, such as Goldberg v. Kelly (1969), can only detract from overall wealth and efficient economic behavior. The Coase theorem implicitly holds that many of the legal attempts to improve the economy are illusory, because there is no way to improve over the combination of clear legal entitlements and no government interference.

The implication in economics is that governments must intervene to lower transaction costs where feasible.

The implications in politics are that, in a free society, it is almost irrelevant who has wealth and who does not with respect to economic activity. Useful or desired economic activity will occur regardless of who owns property or wealth. A list of the wealthiest individuals (Forbes 500) is meaningless, as wealth will flow to efficient activity regardless of who controls the money.

A basis for this theorem can be found in the Parable of the Talents. One's faith and pleasing of God does not depend how the talents are divided. The person given two talents pleases the master just as much as the person given five talents.

Future v. Past

The Coase theorem proves that the future governs the present, and the past has little or no significance. The assignment of rights or wealth, which is in the past, is virtually irrelevant to the productivity of activity today, which is dictated by future transactions. In this sense the Coase theorem confirms a key aspect of Christianity, a religion focused on the future far more than the past.

Excuses?

The Coase theorem has remarkable power in eliminating excuses for unproductive activity. Transaction costs are the only real obstacle to efficient, productive activity. Coining a famous saying, anyone of any means or background might invent a better mousetrap, and then the entire world will beat a path to his door. There is no real excuse for not realizing full potential or opportunity, except perhaps transaction costs, and all should agree to reduce or eliminate those.

Court decisions

To summarize Ronald Coase's paper The Problem of Social Cost, which can be read on line, a judge should have regard for the total effect of his or her decisions including economic effect. For example, the paper says, making a polluting factory get a better smokestack might be a better decision than making the factory owner pay a fine. How might the problem be solved if money did not exist? Another example implied that making a farmer put a fence around his crops might make more sense than making the owner of the cattle which walked on the crops pay a fine. He mentioned a case of sparks from a steam engine causing a brush fire, and that it may not have been fair to make the railroad pay damages depending on the circumstances and technology. His paper also said there was a case in which a wealthy man stocked rabbits on his land and had to pay damages to to his neighbor because the rabbits got into the neighbor's garden. Mr. Coase believed the decision may or may not have solved the problem morally, depending on the circumstances. His paper analyzes ways in which paying damages or not to the plaintiff might effect the causes of disputes. His famous paper turns out to have very little to do with the theorem carrying his name. ^[2]

References

1. ↑ Ronald H. Coase, “The Problem of Social Cost,” 3 J. Law & Econ. 1 (1960)
2. ↑ Coase, R. October 1960 The Problem of Social Cost. Journal of Law and Economics