Steve Medema's Survey of the Coase Theorem Published in the JEL

Steve Medema's Survey of the Coase Theorem Published in the JEL

Steve Medema, the associate director of the HOPE Center, has published a major survey of the Coase theorem in the December 2020 issue of the Journal of Economic Literature.

Titled "The Coase Theorem at Sixty," the article examines the theorem’s origins, diffusion, and the wide variety of uses to which it has been put by economists and others over the sixty years since Coase published "The Problem of Social Cost."

The theorem states that--but, ah, that is precisely the problem. For one, in Coase's original article, there is no theorem as such. As Steve writes, "What we now know as the 'Coase theorem' is very much a creation of the community of economists and legal scholars who undertook to analyze and apply Coase’s insight." And, as Steve explains, "There is no unique statement of the Coase theorem; there are literally dozens of different statements of it, many of which are inconsistent with others and appear to mark significant departures from what Coase had argued in 1960."

In the 1960 article, Coase explored a situation in which one business harms or damages another interested party. Should the business pay compensation for the damage it caused? The traditional answer was yes. But Coase then asked, Can a mutually agreeable solution be reached without such a payment? Yes, Coase argued, and went on to demonstrate how.

As Steve concludes, the Coase theorem, whatever it may be and whatever form it may take, "is neither prediction nor testable hypothesis nor descriptor nor policy prescription. It is, and can be nothing more than, a benchmark—a generator of predictive, testable, descriptive, and policy insights."

Congratulations, Steve!