Table of Contents
Coase in his article “The Problem of Social Cost” provides a theorem according to which the original distribution of all the property rights inclusive of the liabilities can significantly affect the distribution and allocation of public and private resources to different locations. The theory means that re-distributors can achieve a stable allocation of the resources by simply reassigning the property rights or the liability to them. The paper is a report on the article “The Problem of Social Cost”.
The main points in the article
In the report, there are two most important points that Coase addresses. First, he explains why businesses internalize some externalities. He proves that there are harmful actions of the active organizations that may negatively or positively affect others who are not a part of the team but occupy the neighboring environment. Economists believe the owners of the company should be entirely responsible for any damage that the corporation causes to any party that is not a part of the enterprise. Alternatively, the company can pay taxes equivalent to all the losses that the operation is causing to the environment and the people around. Lastly, the company can as well relocate its residential district that is presumed safe and has no human or animal habitation (Coase 1).
Second, the article addresses the transaction costs and the rights to the assignment of property. An example of the approaches discussed is the Pigou’s approach that argues that if a firm causes a pollution amounting to $100 annually, then it should be charged a tax of the same amount until it will fix the problem and make the environment free from its pollutants (Coase 3).
How the article contradicts Friedman
In this article, Coase suggests that companies should have a limitation on the extent to which they can go with their activities. They are not allowed to affect others or the environment as they try to make more profit. In situations when they negatively affect the people not directly involved in their business they have to compensate them. Friedman, however, believed that the only social role of a firm is to apply all the resources at its disposal and engage in all the activities possible to increase the rate of profits it is making. Profit maximization has its effects since the business is not responsible for the side effects. For instance, the free market system may break, and a pesticide firm may produce dangerous pesticides that may kill plants and animals. Since the company cannot be asked to compensate for this, the people around and the customers are negatively affected (Coase 3).
Critical argument in the article
There are two most important concepts or arguments that improved my understanding of Law and Economics. The first one is the reverse nature of a problem (Coase 2). It is a common belief that if company A affects company B, then specific mechanisms should be developed to protect B from A. The primary responsibility should be designing ways that can protect both parties from each other. Firms and people relate in different ways and are bound to interfere with each other at some point. Therefore, by designing preventive measures the company B will be protected from A and vice versa.
Second, the description of a change of approach (Coase 42) as a method that the economists use to find solutions to dangerous effects in the business environment allows me to view Law and Economics as a tool that helps people to critically think about their problems and develop new and advanced methods of solving them. Relying on the same approach to address different problems may not be reliable enough, especially in situations when the problem requires viewing it from another perspective and the development of a theory that may then be used to find its solution.
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The article is, therefore, an excellent tool that gives real insight into dynamics of social cost. It helps its reader, especially those people involved in business, to consider their external environment as a part of success determinants for any company.