Translated material
Coase theorem.
Among the most general provisions of the new institutional theory is the so-called “Coase theorem”, the main conclusions of which Ronald Coase outlined in the article “The Problem of Social Costs” [1] . Coase himself did not set himself the task of formulating any general theorem. The expression “Coase theorem”, as well as its first formulation, were coined by George Stigler [2] .
The theorem is devoted to the problem of external effects (externalities). This is the name for the by-products of any activity that concern not its direct participants, but third parties. Examples of negative externalities: smoke from a factory chimney, which others are forced to breathe, pollution of rivers by wastewater, etc.
Examples of positive externalities: a private flower garden and lawn that passers-by can admire, paving streets by private individuals at their own expense, etc. The existence of externalities leads to a discrepancy between private and social costs (according to the formula: social costs are equal to the sum of private and external costs, i.e. assigned to third parties). In the case of negative external effects, private costs are lower than social ones; in the case of positive external effects, on the contrary, social costs are lower than private ones.
This kind of discrepancy was first explored by Arthur Pigou in his book “The Theory of Welfare” [3] . He characterized them as “market failures,” since focusing only on private benefits and costs leads to either overproduction of goods with negative externalities (air and water pollution, high noise levels, etc.) or underproduction of goods with positive externalities ( refusal of private individuals to build lighthouses, lay roads, etc.). References to “market failures” served for Pigou as a theoretical justification for government intervention in the economy: he proposed imposing fines (equal in value to external costs) on activities that are a source of negative external effects and reimbursing in the form of subsidies the equivalent of external benefits to producers of goods with positive external effects . Coase's article was directed against Pigou's position on the need for government intervention. The semantic core around which it was built was the concept of transaction costs, introduced in Coase’s earlier work, “The Nature of the Firm.” [4] . By transaction costs he understood the costs and losses that inevitably arise when concluding and completing any transactions (transactions). We are talking about the costs associated with collecting and processing information, searching for partners, conducting negotiations and making decisions, drawing up and legally protecting contracts, monitoring their implementation, etc. Isolating costs of this class means recognizing that the very process of interaction between economic entities is not free. agents. (According to the apt definition of the American economist Stephen Chen, in the broadest sense, “transaction costs” are costs whose existence would be impossible to imagine in the economics of Robinson Crusoe [5] .)
The essence of Coase's argument was that under conditions of zero transaction costs (and this was the premise that neoclassical theory implicitly assumed), the market itself is able to cope with any external effects. The Coase theorem states: “If property rights are clearly defined and transaction costs are zero, then the allocation of resources (production structure) will remain constant and efficient regardless of changes in the distribution of property rights.”
Thus, a paradoxical proposition is put forward: in the absence of transaction costs, the structure of production remains the same regardless of who owns what resource. The theorem was proved by Coase using a number of examples, partly conventional, partly taken from real life.
Let's imagine that there is an agricultural farm and a cattle ranch in the neighborhood, and the rancher's cows can enter the farmer's fields, causing damage to the crops. If the rancher is not responsible for this, his private costs will be less than his social costs. It would seem that there is every reason for government intervention. However, Coase argues otherwise: if the law allows farmer and rancher to enter into voluntary agreements regarding weeding, then government intervention will not be required; everything will resolve itself.
Let us assume that the optimal production conditions, under which both participants achieve maximum welfare, are as follows: the farmer harvests 10 centners of grain from his plot, and the rancher fattens 10 cows. But then the rancher decides to get another, eleventh cow. The net income from it will be $50. At the same time, this will lead to exceeding the optimal load on the pasture and will inevitably pose a threat to the farmer. This extra cow would result in a crop loss of one hundredweight of grain, which would give the farmer $60 in net income.
Let's consider the first case: the farmer has the right to prevent grass. Then he will demand compensation from the cattle breeder, no less than 60 dollars. And the profit from the eleventh cow is only $50. Conclusion: the rancher will refuse to increase the herd and the production structure will remain the same (and therefore effective) - 10 centners of grain and 10 heads of livestock.
In the second case, the rights are distributed so that the rancher is not responsible for the grass. However, the farmer still has the right to offer compensation to the rancher for not raising an additional cow. The size of the “ransom,” according to Coase, will range from $50 (the rancher’s profit from the eleventh cow) to $60 (the farmer’s profit from the tenth hundredweight of grain). With such compensation, both participants will benefit, and the rancher will again refuse to raise a “suboptimal” unit of cattle. The structure of production will not change.
Coase's final conclusion is this: both in the case where the farmer has the right to demand compensation from the rancher, and in the case where the right to weed remains with the rancher (i.e., with any distribution of property rights), the outcome is the same: the rights still transfer to the party that values them more (in this case, the farmer), and the production structure remains unchanged and efficient. Coase himself writes the following on this subject: “If all rights were clearly defined and prescribed, if transaction costs were equal to zero, if people agreed to adhere firmly to the results of voluntary exchange, then there would be no externalities.” “Market failures” would not occur under these conditions, and the state would have no reason to intervene to correct the market mechanism.
Several important theoretical and practical conclusions follow from the Coase theorem.
First, it reveals the economic meaning of property rights. According to Coase, externalities (i.e., discrepancies between private and social costs and benefits) appear only when property rights are not clearly defined and blurred. When rights are clearly defined, then all externalities are “internalized” (external costs become internal). It is no coincidence that the main field of conflict in connection with external effects turns out to be resources that are moving from the category of unlimited to the category of rare (water, air) and for which property rights in principle did not exist before.
Secondly, the Coase theorem deflects accusations of market failure. The path to overcoming externalities lies through the creation of new property rights in those areas where they were not clearly defined. Therefore, externalities and their negative consequences are generated by defective legislation; If anyone is “failing” here, it’s the state. The Coase theorem essentially eliminates the standard charges of environmental destruction leveled against the market and private property. The opposite conclusion follows from it: it is not excessive, but insufficient development of private property that leads to degradation of the external environment.
Third, the Coase theorem reveals the key importance of transaction costs. When they are positive, the distribution of property rights ceases to be a neutral factor and begins to influence the efficiency and structure of production.
Fourth, the Coase theorem shows that citing externalities is not a sufficient basis for government intervention. In the case of low transaction costs, it is unnecessary; in the case of high ones, it is not always economically justified. After all, government actions themselves involve positive transaction costs, so the treatment may well be worse than the disease itself.
Coase's influence on the development of economic thought was profound and varied. His article “The Problem of Social Costs” has become one of the most cited in modern economic literature. From his work, entire new branches of economic science grew (economics of law, for example). In a broader sense, his ideas laid the theoretical foundation for the development of the neo-institutional movement.
However, Coase's ideas were perceived one-sidedly by other economists. For him, the analysis of an ideal economy with zero transaction costs was only a step towards considering the real world, where they are always positive. Unfortunately, this part of his research caused less resonance than the famous “theorem” on which most economists focused, since it fit perfectly into the prevailing neoclassical ideas. As Coase himself admitted, his attempt to “lure” economists out of the imaginary world of the “blackboard” was unsuccessful.
The certificate was prepared by Rostislav Kapelyushnikov
[1] Coase, Ronald H. “The Problem of Social Cost”, Journal of Law and Economics 3 (1960), 1–44.
[2] Stigler, G. J. The Price Theory. 1966.
[3] Pigou, Arthur Cecil. The Economics of Welfare (London, 1920) [Russian. transl.: Pigou A. Economic theory of welfare: In 2 vols. M.: Progress, 1985].
[4] Coase, R.Y. “The Nature of the Firm.” Economica. 4 (1937): 1, 386–405 [rus. transl.: Coase R. Firm, market and law. M., 1993].
[5] Chuenhg S. N. S. The Myth of Social Costs. (L., 1978), 52.