On a recent post about property rights in the land market, commenter David Sucher brought up the issue of transaction costs. He commented here and at his blog City Comforts: The “least intrusive means” should be always kept in mind. The only issue for me is the huge transaction costs which, I believe, make private agreements for land use quite impossible. The very reason we have government is because “voluntary private contracts” are too complex. We got rid of tort law (as to land use) because it was much easier to have uniform area-wide regulations. While David brings up very valid points, I think that economist Ronald Coase offered a persuasive argument against these area-wide regulations. The Coase Theorem, which interestingly, I don’t think we’ve written about in depth here, addresses this issue of transaction costs. In 1960, Coase published his most famous paper, “The Problem of Social Cost,” exploring a common problem for city dwellers: annoyance at their neighbors’ behavior. Coase uses as an example a confectioner whose business is adjacent to a doctors office. The confectioner uses loud machinery which causes vibrations next door and bothers the doctor. We can imagine a variety of solutions to this problem: the doctor could sound proof his office, the confectioner could upgrade to quieter machinery, one of them could move his business, the confectioner could compensate the doctor for the bother, or the doctor could pay the confectioner to stop making noise during his business hours. Assigning property rights would help any of these solutions emerge; if the confectioner has a right to make noise, the responsibility lies with the doctor to remedy the situation (or learn to live with the noise) or the reverse if the doctor has a right to quiet. In a standard Micro 101 class, in my experience, the […]