The Coase Theory

The relation between property and the actions that could have an injurious effect on those who surround us has been the object of many researchers, not only in the economic field, but in the legal one, too. It finds the main reason in the presence of multiple controversial cases that arise every day because of the relations that individuals suffer with other individuals, companies or even the government. In this particular case we have two parties composed by Eddie, who has an electrical company which discharges smoke. On the other hand it’s Lucille, owner of a laundry who apparently receives the damage, for the clothes get dirty because of the smoke of the electric company. However, as we will see later, there are problems that emanate of

Which relation can we extract from the legal concept of property with the bargaining theory? Could our assumptions change if the liability of the parties is changeable? Ronald Coase’s essay, ‘The Problem of Social Cost’ is still a focus of controversy and discussion, since most researchers still cannot agree with the premise that the Coase Theorem tries to convey , claiming that the law should follow the principle of efficiency of the economic field. Does every legal case have an economic perspective that should be taken into account by the court before making a

First, the court decides in favor of Lucille, so Eddie has to install some scrubbers so as to keep carrying out his business. However, he could decide to shut down the company as well. In this particular case, Lucille could keep directing her laundry without paying anything. But what would happen if the court decides that Eddie’s emission of smoke is adequate given the task he is carrying out? If Eddie would gain the favor of the court Lucille would have the need to take some decisions, like installing filters, which are cheaper than scrubbers, or she could have the option of shutting down her business as well and try to install it in some other place away from the neighborhood. What seems clear is that choosing one or the other option has an economic impact that will have a social repercussion. Like Coase points out, each solution will always have a cost, and before analyzing in depth the particulars of every case we cannot adventure ourselves in picking up an option in detriment of the other one .

Moreover, we need to keep in mind that there is no only an economic repercussion after a court made a decision, but a cost to society arises as a side effect additionally. This cost to society receives the name of externality. Coase uses Pigou’s theorem in his research and points out that an externality will always be latent if there is a disagreement between a private interest and the social cost that that interest originates