"The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave. What I did in The Problem of Social Costs was simply to bring to light some of its properties. ... Economists, following Pigou whose work has dominated thought in this area, have consequently been engaged in an attempt to explain why there were divergences between private and social costs and what should be done about it, using a theory in which private and social costs were necessarily always equal. It is therefore hardly surprising that the conclusions reached were often incorrect. The reason why economists went wrong was that their theoretical system did not take into account a factor which is essential if one wishes to analyze the effect of a change in the law on the allocation of resources. The missing factor is the existence of transaction costs."

"... However, once transaction costs are taken into account, many of these measures will not be undertaken because making the contractual arrangements necessary to bring them into existence would cost more than the gain they make possible."
Notes on the Problem of Social Cost, pp. 174-5

"... The same approach which, with zero transaction costs, demonstrates that the allocation of resources remains the same whatever the legal position, also shows that, with positive transaction costs, the law plays a crucial role in determining how resources are used."
Notes on the Problem of Social Cost, p 178

Ronald H. Coase (1910 - )

After holding positions at the Dundee School of Economics and the University of Liverpool, R. H. Coase joined the faculty of the London School of Economics in 1935. He continued at the London School of Economics and was appointed Reader in Economics with special reference to public utilities in 1947.

In 1951 Mr. Coase migrated to the United States and held positions at the Universities of Buffalo and Virginia prior to coming to the Law School in 1964. He has taught regulated industries and economic analysis and public policy. Mr. Coase was the editor of the Journal of Law & Economics from 1964 to 1982. Among his many publications are The Firm, the Market and the Law (1988) and Essays on Economics and Economists (1994). In 1977 Mr. Coase was a Senior Research Fellow at the Hoover Institution, Stanford University. Mr. Coase is a Fellow of the British Academy, the European Academy, and the American Academy of Arts and Sciences. He is a member of the Honour Committee of Euroscience. He holds honorary doctorate degrees from the University of Cologne, Yale University, Washington University, the University of Dundee, the University of Buckingham, Beloit College, and the University of Paris. In 1991, Mr. Coase was awarded the Alfred Nobel Memorial Prize in Economic Sciences.

In Coase's work on the Nature of The Firm (1937), he argued that firms should be conceived as entities endogenous to the economic system and whose existence is justified only in the presence of transactions costs to production. Firms and other economic organizations and institutions, in effects, exist because agents find it a useful manner of minimizing transactions costs.

His second piece, The Problem of Social Cost (1960), presented the famous "Coase Theorem" to the world. Contrary to Pigou's theory that only governments, by means of taxes and subsidies, can "internalize" externalities in economic exchange or production, Coase argued that, when one considers opportunity cost in its full meaning, no such devices are necessary: private losers and winners in such cases can "internalize" these externalities themselves through negotiation and that the result will be identical regardless of which party has rights of ownership over the cause of the externality. In short, the manner in which a property right is initially assigned will not affect the efficiency of resource allocation. The only exception, Coase granted, is when there are transactions costs to negotiation.

These two theorems have found wide application throughout economics - and also law, sociology and political science (particularly of the Chicago variety) and launching the whole field of "New Institutional Economics" - thereby making Ronald Coase one of the leading "imperialists" on behalf of economics into other disciplines. It was on the strength of these theorems that R.H. Coase won the Nobel prize in 1991.

Sources of information: The University of Chicago (The Law School) and The History of Economic Thought