Understanding the Problem of Social Cost

Abstract

Coase always expressed dissatisfaction with neo-classical economics and advocated for a new approach. Rather than using toy mathematical models built from unrealistic, idealized assumptions, Coase preferred to study real-world contexts, including actual legal cases. He demonstrated the utility of his approach in "The Problem of Social Cost". Yet almost all of Coase's contemporaries completely ignored Coase's call for a new approach and his sustained use of legal cases to illustrate his arguments and to situate his analysis in reality. In this paper, we show that the profession interpreted Coase's seminal article exactly the opposite of what he had intended, and reduced his analytical contributions to a toy model of the exact sort he was criticizing. This ironic history of the most cited article both in law and in economics helps us understand the development of ideas within both fields and how disciplinary blinders shape intellectual progress.

Keywords: Coase, The Problem of Social Cost, Liability, Law and Economics

JEL Classification: K00, K10