ABSTRACT
The publication of Ronald Coase’s article, ‘The Problem of Social Cost’ (1960), led to a fundamental rethinking of the economic theory of externalities and of market failure generally. While this article is most commonly associated with the ‘Coase theorem’ – the idea that agents will negotiate efficient and invariant solutions to externality problems in an environment free of transaction costs, assuming some initial definition of legal rights over the relevant resources – the messages contained in it were much more broad than this, even if, as it happened, much more slow to gain traction in the economics profession. These other messages were (1) that the received (Pigovian) approach to externality theory and policy, with its emphasis on the necessity of governmental controls for the efficient resolution of externalities, was fundamentally misguided, (2) that the efficient course of action in situations of externality may be to maintain the status quo, and (3) that a comparative institutional approach was necessary in order to determine the appropriate way to deal with these issues.1
