6.4 The Coase Theorem

The text: Ronald Coase, "The Problem of Social Cost" (1960) — the article that founded law-and- economics. The setup (his own example): the rancher's cattle straying into the farmer's fields — the conventional answer (the polluter pays, the rancher liable) Coase inverts: the harm isreciprocal (restricting the rancher harms the rancher to help the farmer); the question is which use is worth more — and that depends on the initial allocation of the right. The theorem(two claims):1. The efficiency claim: with zero transaction costs, the parties will bargain to the efficient outcome regardless of who holds the initial right (if the farmer holds the right, the rancher pays for the straying; if the rancher holds it, the farmer pays for the fence — either way, the use with the higher value wins; the right's allocation changes only who pays whom, not what happens).2. The institutional claim (the real point): transaction costs are never zero — so the initialallocation of rights matters, and the law's task is to allocate rights to their highest-valued use and to minimise transaction costs (clear property registers, enforceable contracts, cheap courts — the law as the market's plumbing). The lessons (three, memorise): (i) externality ≠ automatic government intervention — bargaining may do it; (ii) the Pigouvian answer (tax the polluter) is not obviously right — the…