The Problem of Social Cost

May 30, 2010

A classic article by Ronald Coase, in which Coase beats me to “my” maxim by 50 years:

Actually very little analysis is required to show that an ideal world is better than a state of laissez faire, unless the definitions of a state of laissez faire and an ideal world happen to be the same. But the whole discussion is largely irrelevant for questions of economic policy since whatever we may have in mind as our ideal world, it is clear that we have not yet discovered how to get to it from where we are. A better approach would seem to be to start our analysis with a situation approximating that which actually exists, to examine the effects of a proposed policy change, and to attempt to decide whether the new situation would be, in total, better or worse than the original one. In this way, conclusions for policy would have some relevance to the actual situation.

Update: When I say “classic,” I should probably emphasize that this may be the most important article in economics, ever. Google scholar shows that it has 14,609 citations. Hayek’s “The Use of Knowledge in Society,” a massively famous article, has 5,648 citations.

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2 Responses to “The Problem of Social Cost”

  1. Rrrobert! Says:

    This cuts both ways on economics – perfect competition isn’t, etcetera. You have to deal with the agents you have rather than the agents that have easily predictable behavior.

    It’s also a massive problem in politics – viz., the left and right wings.


  2. Yeah, this article has implications for just about everything, as evidenced by its citation count (see update).


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