Of Pangloss, Pigouvians and Pragmatism: Ronald Coase and Social Cost Analysis

Abstract

The laissez-faire welfare theory of classical economics was very much concerned with demonstrating the optimality of the competitive market system, or, more generally, the harmony between individual and social interests. Under the influence of J. S. Mill and Henry Sidgwick, however, this view gradually began to erode. Sidgwick (1901), for example, pointed to a number of factors, including what we now call externalities, that can cause individually-optimal behavior to diverge from the social optimum, and suggested that these potentially call for governmental corrective measures. Alfred Marshall carried this discussion a bit further, but it was through A. C. Pigou's analysis—particularly in The Economics of Welfare (1932)—that the theory of market failure, and the need for government correction of these failures, reached full flower. His work formed the foundation for “modern” welfare economics. The contrast between the “old” and the “modern” welfare economics was pointed out by James Buchanan:

Institutional Law and Economics

“…Others at Michigan State University who continue to contribute to this tradition are Harry Trebing, whose works exhibit many of the same concerns as Hale with regard to the analysis of regulation and public utilities (Trebing, 1976(Trebing, , 1989Trebing and Estabrooks, 1993); and Robert A. Solo, much of whose work focuses on monopoly regulation and institutional change (Solo, 1967(Solo, , 1974(Solo, , 1982. Former students of Samuels and Schmid who have gone on to focus their research on the relations between legal (or governmental) and economic processes rather than the application of microeconomic theory to the law, include Steven G. Medema and Nicholas Mercuro writing individually and together on topics including the Coase theorem (Medema, 1994(Medema, , 1996aMedema and Zerbe, 1997), the policy implications of Coasean economics (Medema and Samuels, 1997), the commonalities between the work of the Institutionalists and the work of Coase (Medema, 1996b), law, economics and public policy (Mercuro and Ryan, 1984), the comparative institutional approach to law and economics (Mercuro, 1989b) and on the various schools of thought comprising law and economics, including the institutionalist school (Mercuro, 1989a;Medema, 1995, 1997); Philip Wandschneider (1984 on water rights; and Josef Broder (1981Broder ( , 1983 on the judicial process. Other examples of the institutional approach to law and economics can be found in Bromley (1989), Carter (1985), Kanal (1985), Liebhafsky (1987), Ostrom (1986), Parsons (1974), and Seidman (1973).…”

‘The fugitive’: The figure of the judge in Coase's economics

“…Coase asserted this rule again in his 'Nobel Prize' speech: 'It is obviously desirable that these rights should be assigned to those who can use them most productively' (1992: 718). 6 5 On Coase and the comparative institutional approach, see Bertrand (2014b), Medema (1996), and Medema and Samuels (1998).…”

What do cattle and bees tell us about the Coase theorem?

“…4 Cheung gives examples of contracts between beekeepers and orchard owners that can implicitly be viewed as a 'Coase theorem' mechanism: a monetary 1 On Stigler's interpretations of Coase's article, see Medema (2010-this volume). On the relationship between Coase and his eponym 'theorem', see Medema (1996a) and Bertrand (2010). 2 See Medema and Zerbe (2000) for a review.…”