A commenter at EconLog pointed me to a video of Harold Demsetz criticizing Ronald Coase‘s paper on externalities and transaction costs. There is an appropriate nod to Frank Knight’s argument against Pigou, but the new critique of Coase is completely unconvincing. At the end he acknowledges the existence of “free rider problems” on the commons, but doesn’t explain how that’s different from Coase’s externality problem. He claims that courts introduce the inefficiency by ruling badly, but that strikes me as completely wrong. A world without courts would have the same problem. To take his soot-emitting factory example, what if there were many people doing laundry whose clothes became sooty, and they were unable to organize effectively to strike a bargain with the factory-owner? He mentioned global warming from carbon-emissions, which is a sort of extreme example of having too many parties to effectively make transactions. Even approaching his centennial, Coase should have no problem picking this argument apart.

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