Ronald Coase, RIP

Coase was one of my favorite economists, although I actually haven’t read all that much of his work.  But (sadly) that’s true of most of my favorite economists.  There’s a lot of discussion about how Coase was misunderstood.  So much so that one of the misunderstandings is pretty well known today.  Most people now seem to be aware that the Coase Theorem does not imply that there is no need for government regulation of pollution.  Due to transactions costs, there may be a need for regulation.

Some swing too far in the other direction, and argue that transactions costs are more of a problem than they really are.  For instance, bans on workplace smoking are often justified on transactions costs grounds, but even a superficial knowledge of Coase’s work suggests there is no case at all for laws banning workplace smoking.  Workplaces are privately owned and hence the owner already has an incentive to adopt the optimal workplace smoking policy.

I made this argument earlier and got a lot of pushback.  Since I’m super busy now, I refer you to the comment section of this post, where all your questions will be answered.

Ronald Coase was also a China bull, and I highly recommend the book he wrote on China (with Ning Wang) at the age of 100.  I reviewed it in this post.



9 Responses to “Ronald Coase, RIP”

  1. Gravatar of JAS JAS
    3. September 2013 at 13:54

    “superficial knowledge of Coase’s work suggests there is no case at all for laws banning workplace smoking. Workplaces are privately owned and hence the owner already has an incentive to adopt the optimal workplace smoking policy.”

    I don’t have any knowledge of Coase’s work, it sounds interesting. However, to assume that economic incentives are all that are significant in determining optimal workplace smoking policy seems myopic. There is a lot more involved in dealing with the question of addictive drug use in the workplace. Is the owner addicted? Does she share the workspace? Does she have moral/religious objections to tobacco use? Should she have the right to dictate employee habits? Many other human considerations will factor into “optimal workplace smoking policy”. I suspect you actually agree, but perhaps not.

  2. Gravatar of ssumner ssumner
    3. September 2013 at 14:28

    JAS, None of those lead to the implication that government regulation could improve things. I recommend the comment section of the post I link to.

  3. Gravatar of Geoff Geoff
    3. September 2013 at 15:46

    A lot of people also misunderstand Coase on the other extreme: They believe his theorem shows there is a need for government intervention (that private enforcement of property rights somehow cannot cope with).

    I always found it rather depressing to see so many well trained economists claim that the existence of “transactions costs” in a property rights dispute between Jones and Smith, justifies the existence of a territorial monopoly of enforcement that coercively extracts money/resources from everyone else. It’s an obvious non-sequitur.

  4. Gravatar of Schismatism Schismatism
    3. September 2013 at 20:06

    “Workplaces are privately owned and hence the owner already has an incentive to adopt the optimal workplace smoking policy.”

    And yet…

  5. Gravatar of Nemi Nemi
    4. September 2013 at 01:04

    So, when an activity happens within a privately owned planned economy, transaction costs disaper and perfect information appear?

    That insight is surely worth an article or two.

  6. Gravatar of Morgan Warstler Morgan Warstler
    4. September 2013 at 05:36


    yes. But not in each moment in time. The owner can by fiat say “I only hire smokers, everyone is allowed to smoke, I don’t hire smokers, no one can smoke” or some nuance.

    THEN two things happen:

    1. each worker decides if they want to work there.

    2. we don’t get the NEGATIVE EXTERNALITY of government built up to solve shit like this.

    Government IN AND OF ITSELF produces economic pollution, rents, transaction costs. And it’s bad shit increases exponentially.

    This is why its so imperative that government and its supporters never reach beyond low hanging fruits.

    Getting rid of pollution from 1960’s-1970’s meant there were some easy low hanging reforms. After that stop reaching.

    We had the same thing with public works projects in WPA, that essentially sets the high water mark. $13K a year, work like a dog, no environmental regulations in place…. anything more than that means WPA “success” starts to head towards zero at increasing velocity.

  7. Gravatar of ssumner ssumner
    4. September 2013 at 05:43

    Nemi, Who claimed that?

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. September 2013 at 07:05

    Lynne Kiesling has a post;

    with a lot of links to other good reflections on Coase.

  9. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. September 2013 at 23:36

    I have long thought that Ronald Coase is the most important C20th economist. I know that is a large claim, but it is instructive to look through the list of Nobel Memorial Laureates in Economics and note how much of their key work was based crucially on his insights. (North, Fogel, Williamson & Olstrom are merely the most obvious.)

    I realise macro-economics is flashy (and important) but for changing the way economists look at the world, what C20th economist has done so so pervasively and transformatively as Ronald Coase? And just taking monetary economics, consider how much transaction costs figure in analyses of money.

    I also like the fact that his original insight came from going around and asking folk what they did.

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