Coasian Bargaining, Property Rights, and the State

Abstract

The real purpose behind Ronald Coase’s article, “The Problem of Social Cost” is to point out that government intervention as a solution to supposed market imperfections are not costless. Since government interventions can perhaps lead to greater costs than the problem the intervention is trying to correct, instead of assuming that government can fix the solution it is instead necessary to apply the laws of economics to the real world and see in which case government intervention is the appropriate remedy and in which case the market solution is preferable. The problem with judging the real world in terms of assigning property rights based on maximizing social benefits and minimizing social costs makes various assumptions that are not actually applicable to the real world. Coase views costs and benefits in the aggregate, assumes perfect information where the costs and benefits are known, ignores that how property rights are defined and the initial allocation does matter, and believes that government rules are sometimes capable of maximizing value and wealth even though government rules are themselves not alienable property subject to economic calculation. Coase may consider it important to use economics to explain the real world, but then doing so involves looking at value as subjective and the world as existing in non-equilibrium, something Coase does not believe.