ULE2612 Law and Economics

Topic 3: The Coase Theorem and Property Rights

Assoc. Prof. Dr. Dennis W. K. Khong
wkkhong@mmu.edu.my
April 2019
Handout

1 Reading
Robert Cooter and Thomas Ulen, Law and Economics (6th edn,
Prentice Hall 2011) chap 4.
2.
1. RH Coase, ‘The Problem of Social Cost’ (1960) 3 J of Law &
Economics 1.
3. Guido Calabresi and A Douglas Melamed, ‘Property Rules,
Liability Rules, and Inalienability: One View of the Cathedral’
(1972) 85 Harvard LR 1089.

2 Additional Reading
4. Hernando de Soto, The Mystery of Capital: Why Capitalism
Triumphs in the West and Fails Everywhere Else (Basic Books
2000).
5. Garrett Hardin, ‘The Tragedy of the Commons’ [1968] Science
1243.

3 Property Rights
6. Property vs rights vs property rights.
7. What can we do with property rights?
8. Benefits of property rights

4 Transaction Cost
9. “In order to carry out a market transaction it is necessary to
discover who it is that one wishes to deal with, to inform people

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 that one wishes to deal and on what terms, to conduct negotiatons
leading up to a bargain, to draw up the contract, to undertake the
inspection needed to make sure that the terms of the contracts are
being observed, and so on. These operations are often extremely
costly, sufficiently costly at any rate to prevent many transactions
that would be carried out in a world in which the pricing ssytem
worked without cost.” (Coase 1960, p 15)
10. “. . . if market transactions were costless, all that matters (questions
of equity apart) is that the rights of the various parties should be
well-defined and the results of legal actions easy to forecast. . . . It
would therefore seem desirable that the courts should understand
the economic consequences of their decisions and should, insofar
as this is possible without creating too much uncertainty about the
legal position itself, take these consequences into account when
making their decisions. Even when it is possible to change the legal
delimitation of rights through market transactions,it is obviously
desirable to reduce the need for such transactions and thus reduce
the employment of resources in carrying them out.” (Coase 1960,
p 19)
11. “The problem which we face in dealing with actions which have
harmful effects is not simply one of restraining those responsible
for them. What has to be decided is whether the gain from
preventing the harm is greater than the loss which would be
suffered elsewhere as a result of stopping the action which
producesthe harm. In a world in which there are costs of
rearranging the rights established by the legal system, the courts,
in cases relating to nuisance, are, in effect, making a decision on
the economic problem and determining how resources are to be
employed. It was argued that the courts are conscious of this and
that they often make, although not always in a very explicit fashion,
a comparison between what would be gained and what lost by
preventing actions which have harmful effects. But the delimitation
of rights is also the result of statutory enactments. Here we also
find evidence of an appreciation of the reciprocal nature of the
problem. While statutory enactments add to the list of nuisances,
action is also taken to legalize what would otherwise be nuisances
under the common law. The kind of situation which econo- mists
are prone to consider as requiring corrective Government action
is, in fact, often the result of Government action. Such action is
not necessarily unwise. But there is a real danger that extensive
Government intervention in the economic system may lead to the
protection of those responsible for harmful effects being carried
too far.” (Coase 1960, p 27)

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 5 The Coase Theorem
12. Coase’s paper is on how to deal with the problem of negative
externality and the reciprocal nature of harm.
13. Cooter & Ulen: “When transact costs are zero, an efficient use
of resrouces result from private bargaining, regardless of the legal
assignment of property rights.”
14. Normative Coase Theorem: Structure law so as to remove the
impediments to private agreements.
15. Normative Hobbes Theorem: Structure law so as to minimize the
harm caused by failure in private agreement.
16. Lord Bernstein of Leigh v Skyview & General Ltd [1978] QB 479.

6 Protection of Property Rights

17. Property rules versus liability rules.
Property Rule Liability Rule
Property Rights Owner Struges v Bridgman Miller v Jackson [1977]
(1879) LR 11 ChD 852 QB 966
18.
Non-Property Rights Dennis v Ministry of Spur Industrie Inc v Del
Owner Defence [2003] EWHC E Webb Development
793 (QB) Co 108 Ariz 178 (1972)

7 Tragedy of the Commons

19. Hardin (1968) Tragedy of the Commons
20. Private property versus public property
21. Commons as inefficient
22. Ostrom: Commons versus open-access regime

8 Anticommons
23. Pragmentation of property rights.