Professor Bainbridge...on law, politics, religion, culture & food

Coase redux

Will Baude of Crescat Sententia criticizes the all too common ways in which the Coase theorem is misused (and misexplained):

Very roughly speaking, this Coase Theorem says that if property rights are fully defined and enforceable, and if transaction costs are zero, then the initial distribution of property or rights makes no difference to how they will finally be allocated. ... My pet peeve is seeing Coase cited in support of the optimistic version of this theorem. Last Spring he gave a lecture at The University of Chicago, and said that the point he had always been trying to make was that the assumption of zero transaction costs was a critical one, and often not realized. ... So it's annoying to have one's professor going on and on about asymmetric bargaining games (involving the exploitation of the tragedy of the commons) and then cite the simplified version of the Coase Theorem, as if no game theoretic problems existed there. This is all the more annoying when the class is a large lecture where you aren't supposed to talk back to the professor.

This space has gone around the block a few times with the Coase theorem, most notably here. Suffice it to say that I share Baude's annoyance, but also must confess that as a professor I have done exactly the sort of thing of which he complains. The optimistic Coase theorem is just so seductively beguiling.