Transaction Costs, Resource Allocation and Liability Rules: A Comment

Abstract

In his article on "The Problem of Social Cost" Professor Coase argued that (assuming no transaction costs) the same allocation of resources will come about regardless of which of two joint cost causers is initially charged with the cost, in other words regardless of liability rules. Various writers-including me-accepted that conclusion for the short run, but had doubts about its validity in the long run situation. The argument was that even if transactions brought about the same short run allocation, liability rules would affect the relative wealth of the two joint cost causing activities, and in the long run this would affect the relative number of firms and hence the relative output of the activities.