Explore the Book
Chapter by chapter summary of the book.
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Chapter 1
Institutions, Property Rights, and Transaction Costs
In all of his work Coase emphasized the importance of incorporating institutions into economic theory and empirical economic research. Institutions are the arrangements, the “rules of the game,” that structure social interactions. They vary from informal social norms about acceptable conduct to formal law enshrined in precedent or legislation. Institutions structure social interactions in the sense that they shape the incentives that individuals face as they make decisions, decisions that can affect their own outcomes and the outcomes for other people.
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Chapter 2
Why Do Firms Exist?
In response to the question “why do firms exist?” Coase answered that they exist in order to address—specifically, to keep to a minimum—transaction costs. Coase’s answer unleashed a stream of influential research that is still generating new ideas today (although he did not use that phrase in his 1937 article, calling them “marketing costs” instead). Coase defined transaction costs as “the cost of using the price system” (1937: 390). A more general definition is the cost of establishing and maintaining property rights (Allen 1999:898). As examples of transaction costs, Coase included the task of discovering what market prices are and the cost of negotiating a separate contract for each transaction. Institutions emerge to reduce those costs, but they can never be eliminated entirely.
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Chapter 3
Resolving Disputes: The Problem of Social Cost
How can people resolve conflicts over resource use when that use creates costs for people who are not party to the transaction? Coase used his approach of examining how people resolve such conflicts in reality to look at the history of how disputes were resolved in English common law, from grazing cattle eating a neighbouring farmer’s crops to industrial smoke harming nearby residents.
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Chapter 4
Applied Transaction Cost Economics: Spectrum Allocation
In 1959 Coase published “The Federal Communications Commission,” an article that explained the institutional and historical background of the development and use of radio spectrum in the United States since the 1910s. Coase asked if there was a feasible way to allocate the use of radio spectrum to create the most possible value out of it, which the then-current public interest hearings method did not accomplish. The policy objective should be not to minimize interference along the spectrum, but to maximize output from the spectrum, treating interference as a constraint to be managed (or something that innovation would reduce). Why not define a property right in a specific part of the spectrum for each user, and make those rights tradable? Coase here followed the suggestion of Leo Herzel (1951), who proposed defining spectrum ownership rights and allocating them through auctions.
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Chapter 5
Applied Transaction Cost Economics: Emission Permit Trading
Transaction costs, that is, the costs of defining property rights, shape incentives and how we organize the use of resources. As the example in the previous chapter of spectrum license auctions shows, these ideas have significant policy implications, even if their implementation takes decades. The use of emission permit trading in the United States to reduce air pollution is another example; it too, has long-lasting and great beneficial effects. The design of the emission permit trading program has several Coasean features, particularly the emphasis on institutional design to reduce transaction costs.
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Chapter 6
Coase and the Lighthouse in Economics
Since the 19th century economists have routinely posed the lighthouse as an example of a public good. Ships coming in to port benefit from lighthouse services. Ships cannot individually be excluded from using the lighthouse if they have not paid for it, so the public good argument suggests that ships will free-ride on the payments of others for the provision of the lighthouse. If the free-rider problem is extreme, then there won’t be enough lighthouses, or any at all. For that reason, economists starting with John Stuart Mill in 1848 and most notably Paul Samuelson, who formalized public good theory in 1954, concluded that public goods should be supplied by governments and paid for through taxation. Coase was dissatisfied with this treatment of public goods, and in “The Lighthouse in Economics” (1974) he laid out his critique and an alternative analysis.
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Chapter 7
Problems of Monopoly
An interesting and thorny question in the economic organization of production is monopoly, that is, when a single firm produces all output sold in a market. Coase analyzed two different monopoly questions: how should public utilities price their output, and how should a monopolist that produces a durable good price it?
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Chapter 8
Conclusion
Coase’s pioneering work brought institutions, property rights, and transaction costs into economic analysis, catalyzing new research in diverse fields in economics, management, law, political science, and other social sciences. The fields of law and economics, property rights economics, transaction cost economics, and institutional and organizational economics built upon Coase’s original contributions to our understanding of the organizational structure of production and the effect of law on economic activity. Founded in 2000, the Ronald Coase Institute works to promote institutional and transaction cost scholarship, particularly by connecting young international scholars and providing them with valuable research opportunities. Similarly, the annual Institutional and Organizational Economics Academy brings together European graduate students working in the Coasean tradition. Through such efforts, research and application in institutional, organizational, and transaction cost economics continues to expand and thrive.
