Book Review " The Firm, The Market and the Law

The Firm, the Market, and the Law by Ronald H. Coase

My rating: 5 of 5 stars


This book is written so well by a thinker who has clarity of thought and understands the principles of economics extremely well. Within its seven chapters, the author takes the reader through a very detailed explanation of the nature of the firm, discusses the limitations of the approach to Industrial Organization, the controversy of marginal costs in relation to utilities and tackles the locus classics, which is the "Problem of Social Cost", from which the Coase Theorem derives its name. The concluding chapter is an admonition of classical and Neo-classical economists for taking by faith that lighthouse services can only be provided by public institutions when his historical review shows that up to the mid-nineteenth century, there were private firms providing that service.

No need for spoilers but I find it useful to highlight that the book doesn't necessarily have to be read in the sequence in which the chapters are laid out. If one wanted to know the mind of Coase, then three chapters to read in a sequence are 3, 5 and seven. While the book was published much later, the claim that the study of industrial organization is "stunted" by the focus on firm concentration and monopoly analysis still stands true today. My view is that professional economists, despite having extremely powerful tools, have not developed theories that explain the distribution of market functions and resource allocations between governments and private firms.

In chapter 5, Coase demonstrates that despite its broad citation, some economists and laypeople do not understand the claims and implications of the reciprocal problem presented by externalities. The reciprocal nature of externalities is not self-evident and its counterintuitive implications trouble many people who are fixated with determining liability. It is the longest chapter in the book and fascinating because of the patience that the author shows by going through one claim and alternatives market arrangements to demonstrate the idea that pre-determination of liability is not the sound approach.

To my mind, Chapter 7 is a call for humility and caution by economists. In it, the author goes through a historical analysis to show the genesis of lighthouses in the United Kingdom and how a single firm came to have the exclusive rights to run. He ends the chapter, and the book, with the memorable statement' " In the meantime, economists wishing tom point to a service which is best provided by government should use an example which has a more solid backing".



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Coase Theorem for Wealthy Londoners

My view about the limits to property rights is that all individuals with legitimate rights should explore all means for use of their property with no hindrance. As I read this article by Sarah Lyall, it came to me that a number of property owners in London are choosing to construct pools, theaters and other amenities underground. At first glance, it looks as if this is inordinately expensive but it is just possible because property costs are high and it would not be possible to make acquisitions to allow for the lavish extensions that these owners desire. Because of the limits to extension of property into the sky, these fairly affluent people are choosing to dig underground in order to add to the facilities available to them.

Apart from the illustration of the fact that planning and zoning rules could lead to absurd consequences, I think that this situation reveals that these neighbours should be schooled in the Coase Theorem. Indeed, the excavation and construction creates inconveniences and burden to people in those neighborhoods. And yet, the rise of suits merely suggests that appropriate rules for governing downward expansion are not properly developed. I have not property considered the means for reaching a workable formula but the suits will merely lead to bureaucratic and stiff regulations to the chagrin of all.