The Problem of Social Cost

Abstract

This foundational article in law and economics examines the problem of harmful externalities and challenges the prevailing assumption that government intervention through regulation or taxation is the most efficient solution. Coase demonstrates that in a world of zero transaction costs, private bargaining between affected parties would lead to an efficient allocation of resources regardless of the initial assignment of property rights. The article's central insight—known as the Coase Theorem—has profound implications for environmental law, tort law, and regulatory policy. Coase argues that the real-world presence of transaction costs makes the initial assignment of rights important, and that legal rules should be designed to minimize the costs of transacting.

Key Findings

• In a world of zero transaction costs, bargaining leads to efficient outcomes regardless of initial rights assignment
• Real-world transaction costs make the initial assignment of legal rights economically significant
• Government regulation is not always the most efficient response to negative externalities
• The reciprocal nature of harm means that both parties to a dispute impose costs on each other

Related Statutes

• Clean Air Act
• Clean Water Act

Related Cases

• Sturges v. Bridgman (1879)
• Boomer v. Atlantic Cement Co. (1970)