Coase and Examples

Coase's Theorem is a powerful statement. I have used it an dozens of examples over the years, especially in contradistinction it with Pigou Taxes. They are not exactly parallels or even perpendiculars but they do present some ways to viewing them.

The classic Coase example is the farmer and the railroad. The farmer grows corn and the railroad goes past the farmers field, it sets out sparks. From time to time the sparks may burn down the farmers corn. Should the Government establish rules and regulations to prevent this or do we just the courts, assuming zero transaction costs, settle the argument. Note the zero transaction cost issue.

Let me go a bit further, Let us assume that we allowed the death penalty in civil cases, especially one regarding financial fraud. Would we be better off not having Government regulation but just having Civil Courts with Death Penalty ability to mediate claims. Would Madoff have done what he did, would Bear Stearns still exist? Just think of the extreme.

Now Frances Wolley has raised some fine discussions regarding this. As she states:

In The Problem of Social Cost, Ronald Coase argues that  the outcome is "the same whether or not the cattle-raiser is held responsible for the crop damage brought about by his cattle". As long as it is clear who is liable for the crop damage, and there are no costs of negotiating a settlement, "the ultimate result (which maximises the value of production) is independent of the legal position".

In other words, it doesn't matter who is responsible for building the fence, as long as the cost of the fence is less than the cost of the crop damage, the fence will be built - and in the least costly fashion. 

Now I have never taken the approach of detailing a Coase example, I have just argued its application and its consequences in extreme cases as above.

Now Frances has raised several interesting issues as do the comments attached thereto. I think my examples of Coase may add a bit to the discussion, but one must always remember the zero transaction costs assumption. Now with the over abundance of Administrative Laws, it may be said that we may never ever again see even close to zero transactions cost.