Ronald Coase 1910-2013

Nobel Prize winning economist Ronald Coase passed away yesterday at the age of 102.  He is best known for the Coase Theorem which many conservatives cite as a justification against environmental regulation.  Unfortunately, that is not what the Coase Theorem really says:

Which, of course, isn’t what Coase had said at all. In his 1960 paper, he made clear that he was talking about a world in which the affected parties can come together, with all relevant information at hand, and reach a voluntary agreement at zero cost. “This is, of course, a very unrealistic assumption,” Coase wrote. In cases of industrial pollution, thousands of people, or even more, can be affected. Getting them together, and persuading them all to agree on a settlement, can be a monumental and very costly undertaking. Coase noted:

Direct government regulation will not necessarily give better results than leaving the problem to be solved by the market or the firm. But equally there is no reason why, on occasion, such government administrative regulation should not lead to an improvement in economic efficiency. This would seem particularly likely when, as is normally the case with the smoke nuisance, a large number of people are involved, and in which therefore the costs of handling the problem through the market or the firm may be high.

Corralling the victims isn’t the only problem. In many environmental cases, for example, there is no agreement on how extensive the damage is, or how much it would cost to rectify. Sometimes—take, for example, the long-term health implications of the radioactivity leak at Fukushima—this information isn’t just disputed: it doesn’t exist. We just don’t know how many people will get sick in the coming years as a consequence of being exposed to the radiation.

Coase’s point was that in the real world, government regulation can make the world better or worse and that categorical statements about government intervention in markets were baseless.

By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.