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 24: Some failures of the popular Coase Theorem

Joseph Farrell


The Coase Theorem – the part that deals with efficiency – has several closely related formats. ● In one of its shapes it is a rigorous, if somewhat tautological, claim that in certain circumstances (those conducive to efficient private negotiation), private negotiation leads to efficiency. ● In another shape it is a challenge question: in a particular context, why wouldn’t negotiation lead to efficiency – why wouldn’t the circumstances conducive to the tautology hold? ● But perhaps the most widespread form is what I call the popular Coase Theorem: neither a tautology nor a salutary challenging question, but an often inexplicit belief that, in the real world, a good approach to public policy is to let people negotiate privately, and a view that the ability to negotiate largely resolves most economic policy issues, or at least helps a lot. One can’t quarrel with a tautology (if the tautologists are careful). And the challenge question is often salutary: in fact, I believe that is the real and very valuable contribution of what is usually called the Coase “Theorem”. The Challenge is salutary because addressing it often enhances our understanding, not because it’s an unanswerable rhetorical question whose conclusion usually is that of course the claim is true. But, as that point suggests, the “popular Coase Theorem” is apt to get it wrong. This chapter briefly illustrates some of the (multiple) ways and circumstances in which that happens.

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