The Coase Theorem

It’s a mind-boggling insight that has transformed the way that (at least some of us) do economics. Megan McArdle has an outstanding description of the Coase Theorem and how it relates to spam. She points out something that usually gets lost in how people discuss and, gasp!, teach the Coase Theorem — in order to get the efficient outcome regardless of the allocation of property rights, transaction costs have to be zero. Now, we all know that the only place that happens is on a blackboard, so the interesting analyses come in when you think about changing transaction costs and how that affects our choices and the outcomes derived from them. This is where I spend a lot of my life, in this avenue of research, so I am grateful to her for raising it.

UPDATE: Then I trundle over to Virginia Postrel’s house, and find that she wrote about Coase late last week while I was away. Scroll down to the heading “READ COASE” and I strongly recommend her advice. The Coase article she mentions was one of the most transformative things I read in graduate school.