THE COASE THEOREM IS NEUTRAL ON GOVERNMENT REGULATION. The Coase Theorem is often cited to make the point that a solution to problems created by “externalitites”—-what happens when my activities have an effect on others—can be worked out without government action. There is no need for the government to intervene in the airplane-reclining-seat problem. This article by Timothy B. Lee makes the important point that the facts are critically important in determining the most efficient solutions. Coase was emphasizing the importance of transaction costs. Lee gives the example that: “In the real world, it’s not practical for millions of people to each pay a few dollars to convince a factory owner to shut down, or for the factory owner to send out millions of tiny checks each month.” By the same token, as Coase pointed out (and Lee quotes him), there are transaction costs to government regulation.

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