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Ronald Coase, Nobel Prize Winner

Tuesday, September 03, 2013
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Ronald Coase, the British Nobel Prize winner (1991) has passed away aged 102. He published his final book, How China Became Capitalist, aged 101! The book details the extraordinary, and often accidental, journey that China has taken over the past thirty years in transforming itself from a closed agrarian socialist economy to an indomitable force in the international arena.

The following obituaries summarise Coase's work and life well - the Chicago Law School and the FT's

A-level pupils may be most familiar with Coase's work regarding the Coase Theorem (though Coase himself pointedly stated that the theorem was based on perhaps four pages of his 1960 paper The Problem of Social Cost and that the "Coase theorem" is not about his work at all).

That said, the Coase Theorem can be summarised as the following: The theorem states that when trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining. (He was a key proponent of treading things like radio spectrum as property to be sold to the highest bidder, so that it would be used more efficiently).

His 1960 paper on The Problem of Social Cost rejected the need for government intervention. To quote the FT, "“The Problem of Social Cost” describes a new approach to the externalities that had troubled an earlier generation of economists – the smoking chimneys and suchlike, when production interfered with others. Yet the amount of smoke would be the same whether the chimney owner had to compensate his neighbours for the damage or the neighbours bribed the factory to restrain its output.

This seemed to have a startling consequence. The reason for imposing liability on the factory owner is not justice – the polluter should pay – but efficiency: it is cheaper for the owner to pay the victims than for those who suffer to organise themselves to negotiate with the owner. Legal liability rules should be assessed not for their fairness but for the relative costs they impose.

This approach, drawn from his work, has wide-ranging implications. Market forces drive not only the transactions undertaken within a framework of economic institutions but also the design of economic institutions themselves. If market outcomes are generally efficient, a presumption of efficiency applies not just to the outcomes of the market economy but also to the social framework from which these outcomes emerge – at least at the micro level."

On the other hand, the following blog illustrates the common confusions about Coase's key theorems: http://afinetheorem.wordpress.com/2013/09/03/on-coases-two-famous-theorems/?utm_source=dlvr.it&utm_medium=twitter




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