| The most influential university course I ever took was numbered BUEC 495. It was titled "Economic Analysis of the Law". In particular, it was a fascinating treatise on the Coase Theorem; perhaps half of the class was spent on understanding it and its implications. The theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasian bargaining. http://en.wikipedia.org/wiki/Coase_theorem Especially for our industry, which make systems that deal with data, information, transactions, etc, I think we have to be especially appreciative of what the Coase Theorem can imply. At a fundamental level, the technology our industry develops is all about lowering transaction costs, whether we're aware of it or not. And that lowering of transaction costs means that the world does become more efficient at allocating resources, if the Coase Theorem is true. Our professor read us a passage from Knowledge and the Wealth of Nations, part of which is cited here (edit: only a bit more detailed than the text in OP, but I still think it's a cool scene worth mentioning): http://www.salon.com/2006/11/16/milton_friedman/ That was the night Ronald Coase came to dinner at Aaron Director’s home to defend his views of transaction costs against a skeptical Chicago department. Coase had submitted a paper arguing that simply assigning property rights and then letting market processes take their course was usually a better solution than costly government regulation. The referees were certain that something was wrong with his argument. Hence the occasion of the dinner. George Stigler later recalled, “In the course of two hours of argument the vote went from twenty against and one for Coase to twenty-one for Coase.” Midway, Milton Friedman opened fire, and the bullets hit everyone but Coase. “What an exhilarating event!” wrote Stigler. The guests said good night knowing that intellectual history had been made. Honestly, Coase was and is a brilliant guy. My mind looks at the world in a totally different way due to his work. edit: And I should note that although Coase refuses to take credit for developing the Coase Theorem in OP, everyone else gives him the credit. So I think he's just being modest there. |
What came about much later is the Endowment Effect: that people value things they own more highly than than an identical good that they do not own. Thus initial allocation of property rights matters, even when the common constraints are satisfied.
http://en.wikipedia.org/wiki/Endowment_effect