The Problem of Social Cost
Published in the Journal of Law and Economics in 1960, while Coase was a member of the Economics department at the University of Virginia, "The Problem of Social Cost" provided the key insight that it is unclear where the blame for externalities lies. The example he gave was of a rancher whose cattle stray onto the cropland of his neighbour. If the rancher is made to restrict his cattle, he is harmed just as the farmer is if the cattle remain unrestrained.
Coase argued that without transaction costs the initial assignment of property rights makes no difference to whether or not the farmer and rancher can achieve the economically efficient outcome. If the cost of restraining cattle by, say, building a fence, is less than the cost of crop damage, the fence will be built. The initial assignment of property rights determines who builds the fence. If the farmer is responsible for the crop damage, the farmer will pay for the fence (as long the fence costs less than the crop damage). If the rancher is responsible for the crop damage, the rancher will build the fence. The allocation of property rights is primarily an equity issue, with consequences for the distribution of income and wealth, rather than an efficiency issue.
With sufficient transaction costs, initial property rights matter for both equity and efficiency. From the point of view of economic efficiency, property rights should be assigned such that the owner of the rights wants to take the economically efficient action. To elaborate, if it is efficient not to restrict the cattle, the rancher should be given the rights (so that cattle can move about freely), whereas if it is efficient to restrict the cattle, the farmer should be given the rights over the movement of the cattle (so the cattle are restricted).
This seminal argument forms the basis of the famous Coase Theorem as labeled by George Stigler.
Read more about this topic: Ronald Coase
Famous quotes containing the words problem, social and/or cost:
“Great speeches have always had great soundbites. The problem now is that the young technicians who put together speeches are paying attention only to the soundbite, not to the text as a whole, not realizing that all great soundbites happen by accident, which is to say, all great soundbites are yielded up inevitably, as part of the natural expression of the text. They are part of the tapestry, they aren’t a little flower somebody sewed on.”
—Peggy Noonan (b. 1950)
“... spinsterhood [is considered to be] an abnormality of small proportions and small consequence, something like an extra finger or two on the body, presumably of temporary duration, and never of any social significance.”
—Mary Putnam Jacobi (1842–1906)
“In the early days of the world, the Almighty said to the first of our race “In the sweat of thy face shalt thou eat bread”; and since then, if we except the light and the air of heaven, no good thing has been, or can be enjoyed by us, without having first cost labour.”
—Abraham Lincoln (1809–1865)