In "The Problem of Social Cost" Ronald Coase considered several common law disputes among neighbors whose economic activities conflicted with one another. For example, Sturges v. Bridgman was a nineteenth century nuisance case involving a pediatrician whose practice was hindered by his neighbor, a confectioner whose operation required a noisy mechanical mortar & pestle. Coase showed that if high transaction costs did not interfere, private bargaining would provide a solution which he characterized as efficient -- namely, that the right to continue would be given to the person who valued it most. For example, if the pediatrician valued the right to relative silence at £100, while the confectioner valued the right to conduct his business at £60, the efficient solution would preserve the pediatrician's £100 value over the confectioner's £60 value.
Alternative solutions might preserve the ability of both parties to operate, however, generating a social value of £160. Coase did not consider these, because the tiny market he focused on was too small to include them. His was concerned with transaction costs, and on his assumptions the only parties who could transact were Sturges and Bridgman. This tiny microcosm was a market because Sturges and Bridgman were locked together by virtue of their own previous investments.
But transaction costs are only a portion of the costs of moving resources. Considering all relevant costs usually requires us to focus on larger markets and longer time periods than the micromarkets that inhabit Coase. The law and economics of automobile accidents has followed a different path. Assumptions about the high costs of bargaining in auto traffic situations have turned attention to the overall markets where automobiles operate rather than individual pairwise conflicts. When we refocus our attention in this way, the results that Coase described as efficient are frequently suboptimal. One source of large cost savings is determining where resources should be assigned initially, thus limiting the occasions and costs for further movement. These costs are higher as initial resource investment is less coordinated, more costly, and more specialized as to activity and location. In addition, larger markets have more players, and Coasean markets with many players work poorly. Coase himself realized that in such cases government intervention may be preferable, even for relatively simple conflicts traditionally analyzed under the common law of nuisance or trespass.
coase, coase theorem, law and economics, resource movement, competition Calabresi, transaction costs
Hovenkamp, Herbert J., "Resource Movement and the Legal System" (2013). Faculty Scholarship at Penn Carey Law. 1829.