The Problem of Social Cost

The Problem Of Social Cost

'The Problem of Social Cost' (1960) by Ronald Coase is an article dealing with economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost benefit analysis, and that nuisances that are often regarded as being the fault of one party are more symmetric conflicts between the interests of the two parties. If there were no such things as the costs of doing a transaction, legal rules would be irrelevant to the maximization of production. Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-bearer. Along with an earlier article, The Nature of the Firm, this was cited as being a reason for Coase's award of the Nobel Memorial Prize in Economic Sciences in 1991. As of June 2012, The Problem of Social Cost is the most cited law review article in history.