Coase Text - Summary

Summary – The Problem of Social Cost – Coase:
The Problem of Social Cost (1960). Ronald H. Coase.
Certain firms’ actions have harmful effects on other firms  externalities.
Divergence between private and social costs (product) of firms  most economists say that
the owner of a firm is said to be liable / should pay taxes to compensate for damage  Coase
does not agree with this  both parties should be treated equally (A harms B, but B also has
to be checked = reciprocal nature)  comparing the values of what is obtained and what is
sacrificed  comparing the situations of firms A and B and exploring what can be done to
solve the problem, because avoiding harm for B causes harm for A.

There is a difference between total and marginal costs  pricing systems with and without
liability for the owner of the damaging firm  when a damaging firm has full liability,
marginal costs will be zero  it is necessary to know whether the damaging business is liable
or not for the damage caused, since without the establishment there can be no market
transactions to transfer and recombine them  ultimate result is independent of the legal
position if the pricing system is costless.
In situations of firms damaging other firms, two manufacturers should make a mutually
satisfactory bargain  many situations can be imagined and the costs and benefits can be
calculated  the bargain should be that both the damaging and damaged firm will have the
highest possible benefit, or the lowest possible costs  agreements like this will alter the
distribution of income and wealth between the firms.

The allocation of resources will be the same in the case of no liability as it was when the
damaging firm was liable for the damage caused  the allocation is optimal  assuming that
there is a perfect market.
In some cases, on marginal principles  both parties are responsible and both should be
forced to include a loss amenity, because both parties cause damage  both parties should
take the harmful effect into account in deciding on their course of action.

Coase’s solution  it is necessary to weigh the marginal benefits with the associated
marginal costs.
Solutions to Social Cost  if property rights are assigned and enforced  internalising
externalities (with zero transaction costs)  the decision of the court concerning damage
liability would have no effect on resource allocation.

Under perfect competition, social costs are equal to private costs. If the pricing system /
transaction costs are above zero, it is better for the damaged and damaging firm to get
together and come up with a bargain without involving the government and the legal system
 no litigation.
Coase Theorem  when information and transaction costs are low, the market will produce a
solution to the problem of harmful externalities without regard to the liability  the private
firms are able to agree on/settle a beneficial and socially desirable solution as long as there
are no costs that come along in the process.

Law and Economics  a discipline that combines economic and legal concerns.
Economic institutions are social devices for reducing transaction costs (firms minimise costs)
 returns to scale  more output means lower (variable) costs.
Private deals between agents / firms could accommodate market and government failures 
governmental regulation will not (always) give better results than leaving the problem to be
solved by the market.