Abstract
In this contribution I focus on a particular characteristic of Ronald Coase’s work, as exhibited in “The Problem of Social Cost”: his ability to force upon his audience a clearer grasp of reality than they previously held. More specifically, I aim to consider to what extent the “blackboard economics” that Coase himself derided have been avoided in a Coasean world, taking that expression to refer in some sense to a world where Coasean insights can flourish, and as such to be a world not simply of Coase’s own making but a world that has been developed by others in applying the Coase Theorem. My strategy is to interrogate the nature of a Coasean world through developing a framework that can look more closely at different approaches to theoretical modelling, the different worlds involved in these models, and the different positive and normative applications that can be derived from them. I shall further consider whether the understanding of the law that inhabits a Coasean world reflects a “real-world” legal environment. Finally, I shall seek to assess the impact of Coase’s work on our understanding of the relationship between law and economics, in our world.
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Notes
This amounts to a more charitable approach, as I shall explain in the concluding remarks.
Given the same data and a constant interpretational disposition, different results (ie, normative applications) will not occur in the sense that the result of a direct model will contradict the result of an indirect model, but in some cases a result may be derived from an indirect model that is not (so readily) available from a direct model. On the other hand, although all results once obtained from a direct model can be recast in the form of an indirect model, it may be easier to discern the result initially in the former—where the elements that need to be adapted are already revealed in the positive application of the direct model in a manner suggestive of normative recombination. The different uses of the models may in this way be regarded as a matter of heuristic choice, but, as the discussion of them in the main text makes clear, other important differences follow.
Distinctions in normative applications may be made in terms of designing legal systems to avoid transaction costs, choosing liability rules that minimise transaction costs, and endowing entitlements to mimic an absence of transaction costs (Parisi 2008).
See n. 2 above.
The difference in approach is manifested in Coase himself suggesting a normative application to deal with transaction costs (e.g., Coase 1988, pp. 15, 178–79) while arguing for the insignificance of the positive impact of income effects (e.g., Coase 1988, p. 174). More convoluted attempts to avoid the impact of income effects discussed in Parisi 2008 include recasting the Coase Theorem as a proposition about how a single owner of the conflicting activities would resolve the conflict (Demsetz 1972). This, however, oversimplifies the problem in reducing the key issue to the cost of the damage arising from the conflict to the single owner, O. The more complex problem in the case of separate owners of the conflicting activities concerns the different costs to P and Q of gaining or failing to gain the entitlement, as demonstrated in Sect. 4.2 below.
See n. 1 above.
Similarly with the competing users of the cave.
For simplicity, I consider here use of an indirect model to bring about the standard Coasean normative application, a case of AB in the notation introduced above. A similar exercise could be undertaken for a normative application derived from a direct model, C(B), in which case stage (2) would amount to an expanded understanding of our world introduced at (1) so as to yield the latent potential for a normative application, which is then realised at (3).
Coase’s apparent endorsement (Coase 1988, pp. 14–15) of the suggestion by Steven Cheung that the Coase Theorem can still hold without property rights (Cheung 1986, p. 37) would effectively remove the scope of the Coase Theorem entirely from an environment dealing with law and economics recognisable in our world to “a state of ‘common’ property rights where no individual can exclude another”. Even as a state conjured up on the blackboard, it would be pertinent to ask how exactly the interest not to be excluded can operate without a legal entitlement.
I assume that neither party initially came to the conflict consciously, such that the starting point for valuing that party’s activity already took into account such exposure and risk of loss. A change in this assumption will alter matters but not ultimately affect the central point being made here about the variation in values between worlds. With the changed assumption, there would still be the possibility of finding the alternative values in other instances of those activities isolated from the state of conflict.
There is also the matter of considering the impact of the granting of legal entitlements on the attractiveness of alternative activities to the parties (Halpin 2007).
For discussion of a more localised instance of the phenomenon of obtaining values in the absence of established entitlements, see Halpin 2000.
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Acknowledgments
I am grateful to Alain Marciano for his particularly stimulating and helpful engagement with an earlier draft of this article.
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Halpin, A. Coase’s world and Coase’s blackboard. Eur J Law Econ 31, 91–109 (2011). https://doi.org/10.1007/s10657-010-9199-2
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DOI: https://doi.org/10.1007/s10657-010-9199-2