The Problem of Social Cost

Abstract

If a psychologist were to play a word association game with economists, the most frequent response to the word ‘Coase’ would undoubtedly be ‘the Coase theorem’. The Coase theorem, and the ideas embodied therein, have captured the imagination of economists as have few other ideas. Indeed, Robert Cooter (1987, p.457) has remarked that ‘Anyone who has taught the Coase Theorem to fresh minds has experienced first hand the wonder and admiration which it inspires’. This by itself merits some analysis, and will be discussed below. What is most important here, however, is the development of an entire movement within economics — that of neoclassical law and economics — largely around a single article, Coase’s ‘The Problem of Social Cost’ (1960).¹

‘“When I use a word,” Humpty-Dumpty said, “it means just what I choose it to mean — neither more nor less”’ — Lewis Carroll, Through the Looking Glass.