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Answers to the reading questions about Law and Economics - Week 5
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The answers to the reading questions on the article: 'Coase' by Medema.
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READING QUESTIONS WEEK 55 Law and economics
Medema – Coase
1. (Big question) At the end of this article you find a ‘See Also’ section. Describe
how Coase is connected to the topics listed there: Chicago School, Coase
Theorem, economic analysis of law, and new institutional economics.
Coase was influenced by Arnold Plan while he was at the London School of Economics in
in 1932. Arnold plant taught Coase many lessons that later came to be associated with
the Chicago School. He arrived in Chicago in 1964 "to teach at the Law School and to join
Aaron Director in editing the Journal of Law and Economics." (Medema, 2008) Coase
occupies a place in the history of the Chicago School of economics. Coase’s interest was
the study of how the legal system impacts the economic system – old-style Chicago law
and economics of the sort being published in the Journal of Law and Economics in the
1960s and 1970s. "As such, his interest and intellectual commonalities lie much more
with the older Chicago school of Frank Knight and Jacob Viner than with the Becker–
Stigler–Posner generation." (Medema, 2008)
The Coase theorem says that when transaction costs are zero and rights are fully
specified, parties to a dispute will bargain to an efficient outcome, regardless of the initial
assignment of rights. "The Coase theorem was used to demonstrate that, under standard
neoclassical assumptions, Pigovian remedies for externalities are
unnecessary: costlessly functioning markets, like the costlessly functioning governments
of Pigovian welfare theory, will generate efficient outcomes." (Medema, 2008) Coase is
connected to this topic as he recognized that the transaction costs are pervasive and will
generally preclude the working of this bargaining mechanism. Coase thus concludes that
legal decision-makers should assign rights so as to maximize the value of output in
society.
Economic analysis of law is a topic that reoccurs in this article. "The importance of
understanding the role of transaction costs in economic activity and the influence of
alternative institutional structures on economic performance are hallmarks of Coase’s
scholarship, and both the economic analysis of law and the new institutional economics
are outgrowths of his work." (Medema, 2008) Coase was critical of economic imperialism
generally and of the economic analysis of law in particular. Coase’s interest was not the
economic analysis of law, but rather the study of how the legal system impacts the
economic system.
New institutional economics is also an outgrowth of his work. Coase was regarded as the
founding father of new institutional economics as he had a much greater interest in the
new institutional economics than in the modern economic analysis of law movement à la
Richard Posner.
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