The Problem of Social Cost

Ronald Coase's "The Problem of Social Cost" is a highly influential article in economics that examines the nature of externalities and the role of transaction costs in determining efficient resource allocation.

Coase challenged the traditional Pigouvian approach to externalities, arguing that the assignment of property rights, rather than government intervention, could lead to efficient outcomes.

He demonstrated that when transaction costs are low, private bargaining can resolve externality problems.

The article introduced the concept of "Coase Theorem," which states that if property rights are well-defined and transaction costs are low, efficient outcomes will result regardless of the initial allocation of property rights.

Coase's work has had a profound impact on law and economics, environmental economics, and the broader understanding of market mechanisms.