The Problem of Social Cost

The influence of Ronald Coase's 1960 paper, "The Problem of Social Cost," cannot be overstated. Originally published in the Law School's own Journal of Law and Economics, of which Coase was editor from 1964 to 1982, the paper argues that in the absence of transaction costs, resources flow to their highest-valued use, regardless of the initial allocation of those resources. Nearly 30 years after its publication, Coase feared "The Problem of Social Cost" had been widely misunderstood. He wrote, "Its influence on economic analysis has been less beneficial than I had hoped." His aim, he said, was not simply to describe what life would be in a world without transaction costs, but rather, "to make clear the role which transaction costs do, and should, play in the fashioning of the institutions which make up the economic system." What has become known since as the "Coasean World,"--where rational actors transact freely without need for institutions, firms, or even law—"is really the world of modern economic theory, one which I was hoping to persuade economists to leave."

Coase's theorem directs our attention to the real world—to the world of messy transactions and of choices constrained not just by individual budgets but by the design of the institutions in which those choices are made. Scholars are still grappling with the implications of "The Problem of Social Cost," the most-cited law review article in history, precisely because it requires us to deal with the world as it is, not as we wish it were.

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