David Friedman, son of famous Milton's Friedman, has a unique talent to explain subtle economic issues. It shows again when he walks his or her reader through Coase's contributions.
For instance, dealing with Coase's novel way of looking at costs:
"The first step is to realize that an external cost is not simply a cost produced by the pollutor and born by the victim. In almost all cases, the cost is a result of decisions by both parties. I would not be coughing if your steel mill were not pouring out sulfur dioxide. But your steel mill would do no damage to me if I did not happen to live down wind from it. It is the joint decision--yours to pollute and mine to live where you are polluting--that produces the cost."
I'll let you read David Friedman's insightful explanations. Just let me add that his way of articulating things tells you a lot about how economists think: He starts with "nothing works", goes to "everything works" to conclude "it all depends". The last one might be why most people are so uncomfortable with economists.
The fun thing about this highly pedagogical introduction to Coase is that David Friedman's father and his University of Chicago colleagues gave a hard time to Coase: They thought that Coase's thinking was flawed and invited him to show him why.
Here is a brief account by The Concise Encyclopedia of Economics :
"Yet Coase's soulmates at the free-market-oriented University of Chicago wondered, according to George Stigler, how so fine an economist could make such an obvious mistake. So they invited Coase, who was then at the University of Virginia, to come to Chicago to discuss it. They had dinner at the home of Aaron Director, the economist who had founded the Journal of Law and Economics.
Stigler writes:
"We strongly objected to this heresy. Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument the vote went from twenty against and one for Coase to twenty-one for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it."
Stigler himself labeled Coase's insight the Coase Theorem. "
Now to put it in Coase's words: "All solutions have costs and there is no reason to suppose that government regulation is called for simply because the problem is not well handled by the market or the firm."
In other words, the Devil (or God?) lies in the details. Economics is indeed ecoinomics, the science of the other side of the coin!
More on David Friedman? Have a look here and read David Friedman's Hidden Order (his metaphor on international trade is a rather well-taken one).
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