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Lecture 25

01:790:340 Lecture Notes - Lecture 25: Ronald Coase, Richard Epstein, Richard Posner

Political Science
Course Code
Jefferson Decker

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Law, Economics, and Social Cost
I. Ronald Coase and Law & Economics
A. Three most-cited law review articles ever in the Hein Online law review archive:
i. Louis Brandeis, “The Right to Privacy” (1890)
ii. Oliver Wendell Holmes, “The Path of the Law” (1897)
iii. Ronald Coase, “The Problem of Social Cost” (1960)
B. Reasons Coase’s place on this list is either remarkable or peculiar.
C. Law & Economics: interdisciplinary work field of legal studies that examines the
relationship between legal rules and economic life.
D.Important public intellectuals in the field today include Judge Richard Posner and Prof.
Richard Epstein.
E. Coase helped create and shape the field
II. Social Costs and Public Goods
A. Social cost (sometimes called a “negative externality”): the public or social harm
that is often the byproduct of some sort of private business transaction.
B. For example, noise, air pollution, water pollution, nuisances and hazards,
C. Public good (sometimes a “positive externality”): Some sort of public or social
good that is the byproduct of some sort of private business transaction.
D. For example, vaccination against infectious disease.
E. What’s the problem?
F. The market may “oversupply” one sort of externality and “undersupply”
G. Arthur Pigou: British economist of the early twentieth century.
H. Pigou argued that government could improve social welfare by restraining social
costs through regulation or by taxing them.
I. Coase comes along a few decades later to say … not so fast!
III. Coase’s Critique
A.Coase: Imagine two businesses—a farmer and a rancher— whose properties lie side-by-
B. Problem: the rancher’s cattle sometimes drift across the property line and
eat/trample the farmer’s crops.
C. Legal question: Is the rancher liable for the damaged crops?
D. Policy question: Can government regulation/taxation force the rancher to pay his
full social cost?
E. Coase: From the standpoint of maximizing human welfare, the legal question
doesn’t matter either way.
F. So long as people are free to bargain with one another, the rancher and the
farmer will come to an agreement about how to manage the boundary.
G.Rancher may pay the farmer, the farmer may pay the rancher, someone may
build a fence.
H. But, either way, they will reach the same optimal level of (combined) production.
I. Only way to change human welfare is if government issues top-down regulations
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