Tuesday, 27 October 2009

50 Years of Coasean brilliance

Peter Boettke over at the Austrian Economists blog writes on 50 Years of Coasean Brilliance. Boettke is discussing the the 50th anniversary of the publication of Ronald Coase's watershed article on the Federal Communications Commission.

For those who only know Coase via the so-called "Coase Theorem" (which is in fact due to George Stigler) and the implications of a zero transaction cost world, it should be pointed out that Coase never believed in zero transaction costs. His zero transaction cost analysis (most famously in his "Problem of Social Cost" paper) served mainly as an attack on the standard Pigovian analysis and is there to show that under the assumptions of that analysis, in particular zero transaction costs, the Pigovian remedies - Pigovian taxes and subsidies - are not needed. Coase wanted to move economics away from the zero transaction cost assumption to consider the world of positive transaction costs. It is only in a positive transaction cost framework that things like firms make sense.

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