The Problem of Social Cost

"The Problem of Social Cost" 1960 by Ronald Coase, then the faculty item at the University of Virginia, is an article dealing with the economic problem of externalities. It draws from a number of English legal cases together with statutes to illustrate Coase's impression that legal rules are only justified by consultation to a cost–benefit analysis, & that nuisances that are often regarded as being the fault of one party are more symmetric conflicts between the interests of the two parties. if there are sufficiently low costs of doing a transaction, legal rules would be irrelevant to the maximization of production. Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the nearly efficient right-bearer.

Along with an earlier article, “The quality of the Firm”, "The Problem of Social Cost" was cited by the Nobel committee when Coase was awarded the Nobel Memorial Prize in Economic Sciences in 1991. The article is foundational to the field of law and economics, and has become the almost frequently cited cause in all of legal scholarship.

Theoretical challenges

Guido Calabresi in his book The Costs of Accidents 1970 argues that it is for still experienced to score group liable that produce greater wealth.

In the real world, where people cannot negotiate costlessly, there may be collective action problems of those who caused a nuisance, for spokesperson by smoke emissions from a factory to numerous neighbouring farms, and so getting together to negotiate effectively can be unoriented against a single polluter because of coordination problems. If it is efficient for the farmers to pay the factory to reduce its emissions, some of those farmers may hold off paying their fair share, hoping to get a free ride. The factory may be in a better position to know what measures to take to reduce harm, and can be the cheapest avoider, illustrating Coase's argument.