The Best Bargain I Ever Made
Ronald Coase, 1910-2013.
Sep 30, 2013, Vol. 19, No. 04 • By ANDREW B. WILSON
Coase may have done more to extend our understanding of business and commerce than any thinker since Adam Smith. But his influence did not stop there. He also had a profound influence in challenging the belief that government regulations, taxes, or subsidies were the best and, indeed, the only way of dealing with actions of business firms that have harmful effects on others, with a commonly cited example being the emission of sparks from a train that damages a farmer’s crops along the railroad’s right of way.
In “The Problem of Social Cost,” his second-most-famous essay, published in 1960, Coase argued that most disputes of this nature are best resolved by negotiation, rather than regulation or imposing strict penalties on the damaging party.
As Coase pointed out, both the railroad and the farmer would be better off if the latter agreed not to cultivate the vulnerable portion of his land in exchange for a payment that would equal or exceed the opportunity cost incurred in forgoing its cultivation. In other words, without regulation, the two sides could easily reach a mutually beneficial solution.
“The Problem of Social Cost” gave rise to a whole new body of literature in the field of “economics and the law.”
In awarding him the 1991 prize in economics, the Nobel committee observed that “Coase may be said to have identified a new set of ‘elementary particles’ in the economic system.” Coase himself made no such claim. In 2012 he told an interviewer, “I’ve never done anything that wasn’t obvious, and I didn’t know why other people didn’t do it.”
Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, which promotes market solutions for public policy in Missouri.
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