Series I
On the Problem of Social Cost

Ning Wang

The first and by far the largest series centers on“The Problem of Social Cost，”Coase’s most influential article. This article played a critical part in the rise of law and economics and helped Coase to win the 1991 Nobel Memorial Prize in Economics Sciences. Five other closely related articles are included：“The Federal Communications Commission and the Broadcasting Industry，”“The Federal Communications Commission”“Testimony to the Federal Communications Commission”“Notes on the Problem of Social Cost，”and“Comment on Thomas W. Hazlett：Assigning Property Rights to Radio Spectrum Users—Why Did FCC License Auctions Take 67 Years.”

The first piece in the collection，“The Federal Communications Commission and the Broadcasting Industry，”was a lecture Coase delivered in 1958 at the University of Virginia while he was still teaching at the University of Buffalo. Careful readers will discover there the seeds of the main arguments that he developed fully and forcefully later in“The Federal Communications Commission.”“Testimony to the Federal Communications Commission”was expert testimony Coase gave in 1959 to a government panel, in which he suggested that the United States government use the pricing mechanism to allocate radio spectrums.“Notes on the Problem of Social Cost”is an expository essay that Coase wrote in 1988 specifically for The Firm, the Market, and the Law（Coase，1988a），the first collection of his articles, to address some of the most important criticisms that had been directed at the original paper and to explain the origin of and controversy over the so called“Coase Theorem，”which has played a fundamental role in the birth and development of law and economics[see, for example, the two-volume collection edited by Posner and Parisi（2013），which runs more than twelve hundred pages. See also Medema（2017）]. The last piece in this group is a commentary in which Coase addressed some specific questions related to the FCC and, which is of more interest and importance, revealed some of his convictions about the limitations of reason in human affairs, whose significance has been ignored in modern economics to its peril.

Coase did not take the Coase Theorem, as formulated and popularized by George Stigler（1987[1961]）that“under perfect competition private and social costs will be equal，”as the main message of his article on social cost. But he was reluctant to blame, let alone reproach, Stigler for misinterpretation, whom he admired greatly. Still, Coase made his position clear.“My aim … was not to describe what life would be like in such a world[of zero transaction costs]but to provide a simple setting in which to develop the analysis and, what was even more important, to make clear the fundamental role which transaction costs do, and should, play in the fashioning of the institutions which make up the economic system”（Coase，1988a）. Coase（1991）took great length in his Nobel lecture to expound his view of the Coase Theorem.“I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs. The significance to me of the Coase Theorem is that it undermines the Pigovian system. Since standard economic theory assumes transaction costs to be zero, the Coase Theorem demonstrates that the Pigovian solutions are unnecessary in these circumstances. Of course, it does not imply, when transaction costs are positive, that government actions（such as government operation, regulation or taxation, including subsidies）could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments but what real governments actually do.”

Once we get the Coase Theorem out of the way, Coase’s original message becomes simple and straight.“If rights to perform certain actions can be bought and sold, they will tend to be acquired by those for whom they are most valuable”（Coase，1988a）. This may be called Coase’s law of the market, a conclusion Coase reached through examples in“The Federal Communications Commission.”“Whether a newly discovered cave belongs to the man who discovered it, the man on whose land the entrance to the cave is located, or the man who owns the surface under which the cave is situated is no doubt dependent on the law of property. But the law merely determines the person which whom it is necessary to make a contract to obtain the use of cave. Whether the cave is used for storing bank records, as a natural gas reservoir, or for growing mushrooms depends, not on the law of property, but on whether the bank, the natural gas corporation, or the mushroom concern will pay the most in order to be able to use the cave”（Coase 1959）. Writing at a time when economic collectivism prevailed in various forms, Coase restored our confidence in the market. His law of the market places Smith’s“invisible hand”on a simple and firm legal foundation.

“The Federal Communications Commission”was largely overshadowed, if not forgotten after the publication of“The Problem of Social Cost”and the formulation of the Coase Theorem. However, it is a tour-de-force of empirical work in modern social sciences, best exemplifying Coase’s way of conducting economic research.[3]It investigates a well-specified real-life question. In the process, it navigates a deep sea of meticulous details and brings out penetrating insights which resolve the problem at hand and shed light on a wide range of seemingly unrelated issues. Its narrative is as captivating as a Sherlock Holmes story, and its conclusion, while unexpected and even counter-intuitive at first sight, is so firmly and systematically reasoned that once it is understood, it falls into the category of truths that can be deemed self-evident. That The Firm, the Market, and the Law contains only one empirical article，“The Lighthouse in Economics，”the others all being theoretical in nature, conceals from readers Coase’s devotion to empirical studies and his unique style and craftsmanship as an empirical economist. Coase is by no means a usual empiricist preoccupied with technicalities, such as endogeneity or instrumental variables, but one whose empirical investigation always engages, enriches, and enlightens basic economic theories. Containing“The Federal Communications Commission”and other empirical papers, the present volume helps to bring to readers the empirical side of Coase’s scholarship.