The Problem of Social Cost

The Problem of Social Cost, published in 1960 in the Journal of Law and Economics, is Ronald Coase's second founding essay of New Institutional Economics and of law and economics as a field. Coase argued that when parties can bargain freely and the costs of doing so are negligible, the initial legal assignment of a property right, for example whether a factory or its neighbors hold the right to clean air, does not affect which use of the resource is efficient, only who ends up paying for it, a result later named the Coase theorem. Coase treated this frictionless case chiefly as a foil: in the much more common case where transaction costs are significant, bargaining fails to correct an inefficient initial assignment, so the design of property rights, liability rules and institutions becomes the decisive question for law and economic policy.