The Problem of Social Cost: Coase's economics versus ethics

ABSTRACT Coase's now famous paper, 'The Problem of Social Cost', argues that social harms caused by industry are best addressed through a policy which would be optimal in terms of market efficiency. I argue that this narrowly based policy represents a classic example of the failure of many welfare economists to consider adequately the ethical implications of their recommendations. I also indicate the manner in which Coase's recommendations conflict with intuitively well-established ethical principles. I conclude that only an approach that considers many more features than market efficiency can produce an optimal policy for dealing with the social costs of production.