Home' Policy Magazine : Policy Vol 30 - No 1 Contents 30 POLICY • Vol. 30 No. 1 • Autumn 2014
The LegAcy of RoNALd coAse: commeRciAL impLicATioNs ANd poLicy coNsequeNces
government cannot know whether building
the bridge will improve overall economic
wellbeing. With marginal cost pricing, the
government has no way of comparing the total
costs of the bridge with total willingness to pay.
It could easily turn out that marginal costs are
low and fxed costs are high, with consumers
having a very low total willingness to pay for the
services provided by the bridge. Constructing the
bridge would therefore reduce the community's
Coase’s insights have obvious implications for
modern public utility pricing, but his analyses
did not stop there. He proposed a straightforward
solution: multipart pricing or a two-part tari ,
under which consumers are charged an access
fee that is proportional to the monopolist’s fxed
cost, and a usage fee that is equal to marginal cost.
Tus, by design, revenue covers total costs, and the
willingness to pay for the project must be at least
as large as total costs. Te risk that the government
would build economically wasteful projects
under such an arrangement is therefore likely
to be considerably smaller than under marginal
Tis article has provided a brief overview of
fve of Coase’s most important and interesting
contributions to economics. Two themes can
be found throughout Coase’s writings: careful
attention to institutional arrangements and
details such as legal rules and property rights,
and analyses primarily motivated by ‘real world’
commercial issues or policy questions. Above all,
Coase’s work demonstrates the power of economic
analysis and that, to quote another famous
economist, ‘A few lines of reasoning can change
the way we see the world.'19 Ronald Coase
changed the way we see the world for the better,
and he will be dearly missed.
1 Ronald Coase, ‘The Institutional Structure of
Production,’ Prize lecture delivered to the memory of
Alfred Nobel (9 December 1991), published in American
Economic Review 82:4 (1992).
2 Te Royal Swedish Academy of Sciences, ‘Te Sveriges
Riksbank Prize in Economic Sciences in Memory of
Alfred Nobel,’ press release (Stockholm: 1991).
3 Ronald Coase, ‘Te Nature of the Firm,’ Economica 4:16
(1937); Ronald Coase, ‘Te Problem of Social Cost,’ Journal
of Law and Economics 3:1 (1960).
4 Ronald Coase, ‘Te Nature of the Firm,’ as above.
5 F.A. Hayek, ‘Te Trend of Economic Tinking,’ Economica
6 Commonwealth of Australia, Australia's Export
Infrastructure, Exports and Infrastructure Taskforce,
Report to the Prime Minister (Canberra: May 2005), 2.
7 Tese ‘Williamsonian tradeofs’ are well known in the
analysis of horizontal mergers. See Oliver Williamson,
‘Economics as an Anti-Trust Defense: The Welfare
Trade-ofs,’ e American Economic Review 58:1 (1968).
8 Alex Robson and Stergios Skaperdas, ‘Costly Enforcement
of Property Rights and the Coase eorem,’ Economic
eory 36:1 (2008). See Alex Robson, Law and Markets
(London: Palgrave Macmillan, 2012) for a further
discussion of the Coase eorem.
9 James Buchanan, ‘Te Coase Teorem and the Teory of
the State,’ Natural Resources Journal 13 (October 1973);
Donald Wittman, ‘Why Democracies Produce Efcient
Results,’ Journal of Political Economy 97:6 (1989); Donald
Wittman, The Myth of Democratic Failure (Chicago:
University of Chicago Press, 1995); Francesco Parisi,
‘Political Coase Teorem,’ Public Choice 115:1–2 (2003);
Barbara Luppi and Francesco Parisi, ‘Politics With(out)
Coase,’ International Review of Economics 59 (2012).
10 Varouj A. Aivazian and Jeffrey L. Callen, ‘The Coase
Theorem and the Empty Core,’ Journal of Law and
Economics 24:1 (1981).
11 Alex Robson, ‘Transaction Costs Can Encourage Coasean
Bargaining,’ Public Choice (September 2013).
12 Ronald Coase, ‘Durability and Monopoly,’ Journal of Law
and Economics 15:1 (1972).
13 See Nancy Stokey, ‘Rational Expectations and Durable
Goods Pricing,’ Bell Journal of Economics 12:1 (1981);
Faruk Gul, Hugo Sonnenschein, and Robert Wilson,
‘Foundations of Dynamic Monopoly and the Coase
Conjecture,’ Journal of Economic eory 39:1 (1986).
14 For example, John Stuart Mill frst used the example of
a lighthouse in his Principles of Political Economy (1848).
15 Ronald Coase, ‘Te Lighthouse in Economics,’ Journal
of Law and Economics 17:2 (1974).
16 For a further discussion, see Alex Robson, ‘A Labour Market
Fable,’ Policy 20:4 (2004).
17 Dennis Mueller provides a summary of dozens of
examples the superiority of private ownership that have
been studied in the empirical literature. See Dennis
Mueller, Public Choice III (Cambridge: Cambridge
University Press, 2003).
18 Ronald Coase, ‘Te Marginal Cost Controversy,’ Economica
19 Steven Landsburg, The Armchair Economist
(Free Press, 1995).
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