Coase on the Coase Theorem, “The Social Cost Controversy”

What did Coase teach about “The Social Cost Controversy” in the classroom? In 1972, an important year in the development of the economic approach to law, Coase taught “The Problem of Social Cost” and some important critiques of it, making his classroom a model of the market for ideas. Coase stressed the importance of his proposal for a new welfare economics, in which the opportunity cost of alternateve proposals would be examined, taking transaction costs into account. He used court cases to provide real world examples where transaction costs could be considered. He also presented a comprehensive critique of Pigou and his followers. Coase demonstrated that the nineteenth Century in Britain was not a period of unregulated laissez faire but a time when harmful effects were governed by the common law of nuisance. Accordingly, he advocated neither laissez faire nor government regulation in principle as a solution to problems of harmful effects. Instead, he proposed that problems of harmful effects be examined in their institutional settings considering the cost of transactions, examining the costs and benefits of alternative institutional arrangements. The cases he chose generally involved technical innovation which produced new benefits as well as harmful effects, producing many insights into how society responds to innovation. Coase taught “The Social Cost Controversy” in order to propose his new welfare economics. However, the content of this portion of his course had many practical applications for his students.