The Elgar Companion to Ronald H. Coase
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The Elgar Companion to Ronald H. Coase

Edited by Claude Ménard and Elodie Bertrand

Ronald H. Coase was one of the most innovative and provocative economists of the twentieth century. Besides his best known papers on ‘The Nature of the Firm’ and ‘The Problem of Social Cost’, he had a major role in the development of the field of law and economics, and made numerous influential contributions to topics including public utilities, regulation and the functioning of markets. In this comprehensive Companion, 31 leading economists, social scientists and legal scholars assess the impact of his work with particular reference to the research programs initiated, the influence on policymakers, and the challenge to conventional perspectives.
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Chapter 22: Coase and the departure from property

Benito Arruñada


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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