The Problem with the Problem of Social Cost, part I: The Problem Examined and the Problem Not Examined

Ronald Coase's "The Problem of Social Cost"(1960) was "concerned with those actions of business firms which have harmful effects on others." The standard examples Coase examined and the economic analysis he challenged were taken ultimately from Pigou's treatment in the Economics of Welfare (1920). It was Coase's contention that the suggested courses of action in the Pigouvian tradition – liability, taxation or regulation – were inappropriate and often not desirable.

Coase didn't consider the full range of Pigou's examples and analysis, however. His focus on so-called externalities – what Pigou referred to, in part II of Economics of Welfare, as incidental uncharged disservices or uncompensated services – responded to the version of neoclassical welfare economics that prevailed in the 1950s but it omitted consideration of the Institutionalist legacy derived from Pigou's discussion of "The National Dividend and Labour" in part III of the Economics of Welfare. Donald Stabile (1995, 1996) has argued that it was this focus on working conditions and welfare that profoundly influenced American Institutionalist economist, John Maurice Clark, in his analysis of the social overhead costs of labor.

Next: part II. The Supposed Reciprocal Nature of the Problem Reconsidered