Legal Theory Lexicon for 1Ls: The Coase Therom

For the first few weeks of the Fall Semester, Legal Theory Blog features select Legal Theory Lexicon entries of special interest to first year law students. Introduction This week the Legal Theory Lexicon investigates the Coase theorem. Ronald Coase is a member of the law and economics faculties at the University of Chicago and a winner of the Nobel Prize in Economics. The idea that we call the Coase Theorem was advanced in a very famous paper: Coase, R.H., The Problem of Social Cost, Journal of Law and Economics 3, 1-44 (1960). Externalities To understand the Coase theorem, we first need to introduce another idea, the externality. Roughly speaking, an economic externality is cost imposed by an activity that is not accrued by the person or firm who engages in the activity. That's a mouthful. Here's an example: The Reading Railroad has track that goes by Farmer Jones's farm. The locomotives cast off sparks that cause a fire that damages Farmer…

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