To me, the starting point for this Chicago School was Ronald Coase\’s 1960 article, The Problem of Social Cost, which established the Coase theorem. Before Coase\’s article, the mainstream school of thought on externalities was dominated by Arthur Pigou\’s welfare economics. Pigou advocated government interventions to internalize externalities—most notably, taxes on negative externalities, and subsidies for positive externalities. (Hence the term, "Pigovian tax.") Coase, however, showed that under certain assumptions—most importantly, well-defined property rights and zero transaction costs—parties would internalize externalities through private bargaining, without government intervention. The idea that market failures should be remedied without government intervention is central to Chicago School economics. Coase\’s landmark article, in my mind, was the liftoff point for the Chicago School.

And, when we\’ve got non-well-defined property rights then we might need government action to define them….and when transaction costs are high, we might need to step back to Pigou.

Thus cap and trade and carbon taxes……

3 thoughts on “Quite”

  1. And governments weaken property rights and raise transaction costs so we need government to regulate and tax us more. Excellent!

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