The Coase Theorem at 60

19 Dec, 2020 at 23:01 | Posted in Economics | Comments Off on The Coase Theorem at 60

Steven Medema — who knows more about the theories of Ronald Coase than any other economist yours truly is familiar with — has written an incisive and learned article about the history of the Coase theorem —  The Coase Theorem at Sixty — in the latest issue of Journal of Economic Literature. Medema concludes :

The Coase theorem is, by any number of measures, one of the most curious results in the history of economic ideas. Its development has been shrouded in misremembrances, political controversies, and all manner of personal and communal confusions and serves as an exemplar of the messy process by which new ideas become scientific knowledge. There is no unique statement of the Coase theorem; there are literally dozens of different statements of it, many of which are inconsistent with others and appear to mark significant departures from what Coase had argued in 1960.

Applying the theorem (nota bene, as emphasized by Medema, the theorem does not in its standard rendering even come close to Coase’s own thoughts on the issue) in the real-world certainly can be dangerous:

misWillingness​ to walk away from an ‘unfair’ offer is [one] reason why the predictions of the Coase theorem often fail. I had discovered this firsthand many years earlier in Rochester. Our home there had a willow tree in the backyard … The neighbor hated that tree. He asked me to have the tree removed …

I knew the Coase theorem … So I went to talk to my neighbor and told him that, while the tree did not bother me, if he felt strongly about it, I would let him arrange to remove it at his own expense. He thought this was the most outrageous suggestion he ever heard, slammed the door in my face, and never broached the subject again.

When people are given what they consider to be unfair offers, they can get angry enough to punish the other party, even at some cost to themselves. That is the basic lesson of the Ultimatum Game. As the willow tree story illustrates, the same can occur in situations in which the Coase theorem is often applied.

For yours truly’s own take on the Coase theorem — in Swedish only — see here or my “Dr Pangloss, Coase och välfärdsteorins senare öden,” Zenit 4/1996.

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