The Problem of Internalisation of Social Costs and the Ideas of Ronald Coase

Abstract:     
This work examines the influence of Coasian thought on the analysis of externalities as used by economists and legal economists. Ronald Coase, a Chicago scholar, advanced a series of critiques of the Pigovian tax system; the theorem that bears his name is merely the best known. In his 1960 work, he sought to demonstrate that the internationalisation of social costs was not always socially useful. In addition, he identified other institutional solutions to which systems can - and often do - resort. One of these solutions is to simply authorise the harmful activity without introducing mechanisms to internalise social costs. Beyond the abstraction of his ideas, Coase's method of analysis has not had a great influence on economists' thinking. His theorem, as it is commonly known, looks more like an elegant, abstract reflection then a tool for identifying institutional solutions to concrete societal problems. Among legal economists, however, Coase's teachings have had a greater influence. Unfortunately, even within this group of scholars, the conviction that external costs should, optimally, be internalised often emerges almost unconsciously in their literature. The risk inherent in this attitude lies in the possibility of finding systems for internalising social costs in legal institutions which do not appear to have such an underlying logic, as for example some kinds of tort liability.

Keywords: Coase Theorem, Welfare Economics, Tort Liability

JEL Classifications: D60, D62, H20, H23, K10

Working Paper Series