Economics Dictionary of ArgumentsHome
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| Coase Theorem: The Coase Theorem, proposed by economist Ronald Coase, asserts that in the absence of transaction costs, bargaining between parties will lead to an efficient allocation of resources regardless of the initial assignment of property rights, as long as property rights are well-defined and parties can negotiate freely. The Coase theorem explains for the first time why companies are formed._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Thomas J. Miceli on Coase Theorem - Dictionary of Arguments
Parisi I 19 Coase theorem/Miceli: Coase’s original motivation in writing his seminal paper on externalities(1) was to offer a critique of the Pigovian view, which asserted that some form of government intervention (taxes, fines, or liability) was required to internalize external harm, such as that caused by straying cattle or railroad sparks. Causation/Pigou: Absent such intervention, the Pigovian view maintained, the “cause” of the harm (the rancher or the railroad) would over-engage in the harmful activity. CoaseVsPigou: Coase challenged this view by first noting that causation is reciprocal in the sense that both the injurer and victim must be present for an accident to occur. The designation of one party as the “injurer” is therefore arbitrary and in fact represents an implicit awarding of the right to be free from harm to the other party (the “victim”). Pigovian view: (...) the farmer has the right to be free from crop damage - whether from straying cattle or spewing sparks - and so the rancher or the railroad should be compelled to pay the farmer’s cost. Problem: (...) suppose the farmer-victim is in a better position to avoid the harm, say by moving his crops or not locating near the railroad or ranch in the first place. In that case, the designation of the rancher/railroad as the injurer may actually preclude the identification of more efficient ways of avoiding the harm. Coase’s point in raising the causation issue was to evaluate the conditions under which court-imposed liability is needed to internalize the external harm. Suppose, for example, that in the rancher–farmer dispute the court does not intervene to assign liability to the rancher. Does that necessarily mean that the rancher’s herd will expand inefficiently? Marginal benefit/marginal cost: The answer, of course, is no, provided that the parties can bargain, because if bargaining is possible, the farmer would be able to bribe the rancher to reduce the herd to the point where the marginal benefit from the last cow equals the marginal cost. In this case, property rights in straying cattle effectively belong to the rancher, and the farmer has to “purchase” them, which he will do up to the point where the two parties value the last cow equally. VsPigovian view: Note that this is the reverse of what happens under the Pigovian solution, where the farmer is (implicitly) awarded rights to the straying cattle and the rancher has to purchase them by paying the court-imposed damages. Efficiency: In both cases, however, the outcome will be efficient. Coase: This conclusion - that the initial assignment of property rights does not affect the final distribution of resources, which is efficient - is the Coase Theorem. External costs: [Key point]: When the conditions for the Coase Theorem are satisfied - that is, when bargaining is possible - the assignment of liability for external harms does not affect efficiency because the parties will rearrange any initial assignment of rights to the point where the gains from trade are exhausted. In this sense, the law does not matter for efficiency (though it does affect the distribution of wealth).* Law: When bargaining is not possible, in contrast, the law does matter because the parties will not be able to rearrange inefficient assignments of rights. As a result, the law must be designed with the explicit goal of efficiency in mind. In this way, the Coase Theorem defines the efficient scope for legal intervention (Demsetz, 1972)(2). >Liability/Calabresi/Melamed. * The conclusion that the efficient allocation of resources will be achieved regardless of the initial assignment of legal rights mirrors the First Fundamental Theorem of Welfare Economics, which says that market exchange will be efficient regardless of how property rights are initially assigned. The >Coase Theorem thus shows that externalities need not preclude this outcome as long as bargaining costs are low. Cf. >Liability/Calabresi/Melamed. 1. Coase, Ronald (1960). “The Problem of Social Cost.” Journal of Law and Economics 3: 1–44. 2. Demsetz, Harold (1972). “When Does the Rule of Liability Matter?” Journal of Legal Studies 1: 13 - 28. Miceli, Thomas J. „Economic Models of Law“. In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University Press._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Miceli, Thomas J. Parisi I Francesco Parisi (Ed) The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017 |
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> Counter arguments against Miceli
> Counter arguments in relation to Coase Theorem
