Running head: THE COASE THEOREM WITHIN THE CONTEXT OF TRANSACTION COSTS AND EXTERNALITIES The Coase Theorem within the Context of Transaction Costs and Externalities April 01, 2009 The Coase Theorem within the Context of Transaction Costs and Externalities Introduction The Coase Theorem first emerged from an argument in The Problem of Social Cost, written by Ronald Coase. Nowadays, this theorem has become a subject of heated debates, becoming a centerpiece of economic movement and modern law. The research examines the Coase Theorem, and undertakes an effort to evaluate the appropriateness and validity of most important issues related to the Coase Theorem debates, and analyses and assesses the Coase theorem within the context of transaction costs and externalities. The Coase Theorem The essay The Problem of Social Cost written by Ronald Coase in 1960, is one of the most famous works in the world of legal literature and economics. This unusual popularity is explained by the argument the author presented in his seminal essay, referred to as the Coase Theorem. Although it should be clearly stated that the Coase Theorem should not be perceived as the major idea in this work, still, it has managed to capture a lot of attention of the legal scholars and economists. In The Problem of Social Cost the author discussed an assumption that, if assumed from the economic viewpoint, the major aim of the world legal system is to reach economic efficiency by means of establishing specific patterns of rights.
The Essay on Externality Definition
1. An externality is defined as a benefit or cost that is imposed on a third party, such as society, other than the producer or consumer of a good or service, or, more simply, an economic side effect. The more of a product that is consumed or produced, the more of an externality that results. When discussing externalities in general terms, positive externalities refer to the benefits and negative ...
According to Coase (1960, p. 2), the legal system has great influence on transaction cost, and, therefore, the major goal of the legal system is to reduce the costs or harm to the lowest possible minimum. The author then dwells on importance of transaction costs, and, to illustrate his standpoint, Coase uses as an example a crop damage because of straying cattle in order to demonstrate the nature of contracts or bargaining that might be struck. Coase also mentioned that in this case any attempt to negotiate among the parties who were influenced or incurred the damage would lead to invariant and efficient outcome if assuming that the parties lead their activity under standard assumptions of competitive markets, especially in case there will be no costs of transactions (DeSerpa, 1992).
Also, it is important to know whether the damaging business is liable for the damages, as far as if it is impossible to establish this delimitation of rights, there will be no market transactions to recombine or transfer them. However, as it is emphasized by Coase in his essay, the result, maximizing the value of production will be independent of legal position in case the pricing system is supposed to work with no cost involved. Although this was the second attempt to formulate the theorem, as Coase expressed his idea in The Federal Communications Commission, its formal statement did not appear until 1966, when one of the scholars, George Stigler (1966, p.113) assumed that The Coase theorem …
asserts that under perfect competition private and social costs will be equal. (Cheung, 1998) However, in order to analyze the theorem within the context of transaction costs and externalities, it is very important to provide the reader with theorems statement. The theorem was formulated in numerous ways: In a world of perfect competition, perfect information, and zero transaction costs, the allocation of resources in the economy will be efficient and will be unaffected by legal rules regarding the initial impact of costs resulting from externalities. (Regan, 1972 (Cheung, 1998)) if one assumes rationality, no transaction costs, and no legal impediments to bargaining, all misallocations of resources would be fully cured in the market by bargains. (Calabresi, 1968, p. 68, emphasis in original (Cheung, 1998)) In a world of zero transaction costs, the allocation of resources will be efficient, and invariant with respect to legal rules of liability, income effects aside. (Zerbe,1980, p.
The Business plan on Financial statement 3
Restaurants, bars and party places are like food, they are indispensable. With the advent of technology, innovations and industry evolution, the market’s (consumer) needs and wants also elevate. Our CHILL LUX’S RESTOBAR is perfectly created to suit market demands. All our marketing strategies, promotions and other business related aspects are all based from the conservative results of our survey. ...
84 (Cheung, 1998)).
when parties can bargain together and settle their disagreements by cooperation, their behavior will be efficient regardless of the underlying rule of law (Cooter and Ulen, 1988, p. 10 (Cheung, 1998)), and many other statements. Although there are numerous formulations, all of them have the same idea, expressing major differences leading to heated theoretical debates. While reading the assumptions of Coase Theorem, two major claims about outcomes emerge. The first claim implies the idea that irrespective of how the rights are assigned initially, the subsequent allocation of resources will be always efficient. This claim is also known as the efficiency hypothesis, and can be easily found in all statements of the Coase Theorem (Allen, 1991).
Unlike the efficiency hypothesis, the second claim has no reflection in all statements. The second claim is that under alternative assignments of rights there will be always invariant under the final allocation of resources. This claim is also referred to as invariance hypothesis. (Ellickson, 1989) There are many debates and disagreements concerning the correctness of the Coase Theorem, and these debates lead to two different versions of the Coase Theorem the weak version, implying the efficiency hypothesis alone (can be found in the statements by Polinsky, and Calabresi, etc.) and the strong version of the Theorem, that includes both the efficiency hypothesis and the invariance hypothesis (illustrated by the statements by Frech, Regan, Hoffman, and Zerbe, etc).
It should be also mentioned that the implications of the Coase Theorem for economists is that if to assume that remedies are assumed with zero transaction costs, the Pigouvian remedies that are usually required to achieve efficient resolution of externality problems, are not necessary. At the same time, all that is necessary is a statutory rule that assigns rights over the externality to the party, or a common law.
In this case the market/pricing mechanism will be the same as that for ordinary services or goods, over which the rights are defined precisely (Farrell, 1987).
The Term Paper on Assignment: Leadership and Cost Company
COST Company tried their best to grasp the sophisticated technology, thus the COST Company used highly to training the professionals, like the geologists, geophysicists, and the engineers. The COST Company also trained the skilled and semiskilled labor that run the company’s field operations. On the other hand the professional labor and the skilled labor, the two groups always occurs the clashed. ...
Also, in case these rights are clearly defined, the situation will be considered enough (namely, the parties that have done all Pareto-improving actions), and if the party undertake any intervention (e.g., Pigouvian remedies, or anything else), the situation will become worse, instead of improvement. It is quite difficult to claim that the Coase Theorem is correct, as it has, in fact, never been proved formally. The scholars trying to prove its validity or incorrectness tend to illustrate that the Coase Theorem is valid or is incorrect under certain circumstances, in a certain context or under a specific set of assumptions, so it becomes almost impossible to provide enough evidence to either correctness or incorrectness (De Meza, 1998).
While analyzing the theorem within the context of transaction costs and externalities it should be mentioned that externalities are one of the most important market failure problems. According to the scholars standpoint, the most widely accepted description for the externality problem is that benefits or private costs affecting a resource owner are never equivalent to the total of benefits or social costs related to the way a resource owner uses resources. This idea can be illustrated by the example of the use of resource (soft coal) by the resource owner (a steelmaker).
The use of soft coal produces soot, descending on a neighbor office, making it difficult for the office to keep clothes of the employees clean; however, the owner of the resource (steelmaker) does not bear these costs, when he considers using soft coal in his daily steelmaking processes. The Coase Theorem, Transaction Costs and Externalities In his work, Coase mentioned that Pigou did not include one of the most important features of externalities their reciprocal nature.
In other words, according to Coase, externalities will not occur in result of one individuals action, but in result of the combined actions of few (two or more) parties involved. If to come back to the example with a steelmaker and his neighborhood, the existence of soot externality will be attributable not only to the steelmakers production of steel, but also to the neighbor office located in a place where the soot comes to. If this seems counterintuitive, assume that the steelmaker had been producing steel for the last twenty years before his neighbor built the office building. Will it make any sense to claim that the steelmaker is the only cause of the externality? Obviously, no, because the externality in this case is the result of mutual actions of the steelmaker and the neighbor office. Is it really significant? This fact is important because sometimes it makes less sense for the victim to make changes in his behavior than for the injurer (polluter) to change his behavior. The previous example can be used to illustrate this assumption. For example, a steel maker causes $300,000 of damage a year to the neighbor office by pollution or noise, etc. If the steel maker decides to change his steel production methods or to move to the other location, it will cost him $150,000 per year.
The Term Paper on Dumping Of Steel
INTRODUCTION Foreign steel producers plague the U.S. steel industry with unfair competitive practices. This practice is referred to as "dumping". Dumping of foreign steel has been a problem throughout the history of the U.S. steel industry. In the 1990s dumping has become more of a problem, due to the breakdown of the Russian economy and its transition from Capitalism to a free-market economy. ...
Alternatively, the office could close its operations, move and use their land for any other purposes that will not be negatively influenced by pollution, at a cost of $70,000 per year. In this case, which solution is more reasonable having the steel maker or the neighbor office change its behavior? If to evaluate this situation from the efficiency viewpoint, it makes much more sense for the neighbor office to change its behavior, as this solution will allow to prevent damages at a significantly lower cost. In this case the neighbor office is the lowest cost avoider. In other words, ….
