- The Locke Institute series
Chapter 2: Coase and All That
Economists sometimes say that Coase (1960) solved the problem of externalities. While I do not begrudge him his Nobel prize, I have to point out that what he did was clarify the problem, not ﬁnally solve it. In a way he simply demonstrated that Pigou, at the time the standard authority on externalities, had misunderstood the problem. Pigou said that private property alone would not necessarily lead to an optimal outcome. Government action was frequently necessary. Individual actions may impose costs on other individuals and hence we need a government to deal with it. So far Pigou (1929) is clearly right, although it is not obvious that he went far beyond Adam Smith. In a way what he did was clarify the reasoning in an area where earlier economics had generally understood the problem, but not clearly stated it. But if the market and private property do not lead to an optimal outcome because of externalities, that does not prove that governments will do better. We look at the early history of governments and notice that they were largely forceful eﬀorts to transfer resources to powerful people. Those mighty warriors and builders, the Assyrians destroyed the bulk of the Israelite state. Only the small Southern fragment centered on Jerusalem escaped them, and that was not because of good government, but because of a fortuitous outbreak of plague, which frightened them away. Later of course, Jerusalem itself was taken by another government, the Babylonians, who took the bulk of the...
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