ABSTRACT
When it comes to the analysis of real-world externalities (the subject of the last 30 pages of the article), of course, we confront the problem of imperfect markets – imperfections the source of which Coase grouped under the broad umbrella of transaction costs, a concept whose contents remain rather ill-defined to this day. But, Coase argued, if we are to admit of the imperfections that attend markets and exchange, we must do the same for the imperfections that attend state action and recognize that the policies being proffered within the received theory of externalities stand little chance of bringing us to, or even near to, the theoretical optimum. Sound policy, then, becomes an exercise in choosing between imperfect alternatives: allocation via markets/exchange, allocation via state action, or allowing the status quo to persist.5 Coase argued that there is no remedy that is best in an a priori sense, nor will any of these remedies lead us to the optimal solution contemplated by economic theory. Instead, the best attainable outcome, and the means by which to reach it, can only be determined on a case-by-case basis, evaluating the relative efficacy of the various options – though he suspected that the most efficient course of action will often be to leave matters more or less as they are, that the costs associated with market or governmental coordination would likely make such ‘cures’ worse than the externality disease.
