Rethinking Market Failure: 'The Problem of Social Cost' Before the ‘Coase Theorem’

Abstract

This paper explores the reception of Ronald Coase's article, The Problem of Social Cost, over the period 1961-1965. Though this article came to be most closely identified with the idea now known as the 'Coase theorem,' the focus of the early reactions to, and use made of, Coase's analysis was much more diverse, with significant emphasis placed on Coase's advocacy of a comparative institutional approach to social cost issues. Where Coase's negotiation result was taken up, as it was in several places, the analysis is largely affirming of Coase's result. What is common to all of these reactions was the view that Coase had posed a fundamental challenge to the received theory of externalities and of market failure generally.