Chapter 22: Coase and the departure from property
In “The Problem of Social Cost,” Coase (1960) considers a sample of cases in which firms harm each other (farmers and ranchers, railroads and farmers, a noisy confectioner and a quiet doctor). In its first pages, he argues that, assuming zero transaction costs, allocating rights to, e.g., farmers or ranchers, would not affect the final use of resources, as both parties would negotiate and contract to arrive at the wealth-maximizing solution. The rest of the article focuses on the real situation to show that, when there are significant transaction costs, the initial allocation of rights may determine the final outcome. In addition to showing the reciprocal nature of the problem, it points out the essential function of legal institutions in implementing alternative public interventions by judges and governments, and in reducing transaction costs to facilitate private exchange. The analysis in Coase (1960) laid the foundations for a dual function for property institutions. Given that transaction costs make trade difficult, the law strives to reduce them (which requires, for example, “well-defined” property rights). Also, to the extent that transaction costs may impede trade, property law allocates rights in a way that maximizes value, making trade unnecessary (for example, by collocating certain sets of rights together, therefore avoiding any need to negotiate them).
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