Coase theorem, The Coase Theorem: If Pigs Could Fly, Daniel Posin
Business Organizations Law | Labor and Employment Law
Professor Posin is to be congratulated on his recent article in this Review, "The Coase Theorem: If Pigs Could Fly," for creating a precise example that purports to disprove the Coase Theorem. Legal scholarship should strive more towards verifiable or falsifiable statements about the law. Of course, falsifiable statements are a risky strategy, and in this case the risk has materialized. Posin's claim—that his example shows a flaw in the Coase Theorem—is false.
Posin's claim is an especially bold one, for his example deals with a shifting legal entitlement between two producers. Most successful attacks on the Coase Theorem have critiqued its purported applicability to consumers. Indeed, Professor Coase himself has recently declared that he never claimed his analysis could be applied to consumers. Thus, if correct, Posin's claim that the Coase Theorem fails as applied to producer behavior would be news indeed.
Professor Posin is also to be congratulated on a clever title to his article. He colorfully suggests that the reasoning surrounding the Coase Theorem is like assuming pigs have wings, and then constructing "a science of animal husbandry around the principle of porcine aerodynamics." He implies that a world where pigs can fly is not earth. I agree that the Coasean world is a strange place. I will not claim that pigs can fly in such a world, but wooden accountants cannot soar either. Certainly, whether the rule of law is for or against him, a cattle rancher will add ponies to the herd if that is the best alternative, and will add cows if they become more profitable again. Wooden accounting measures of cost and rate of return, which infect Posin's analysis, are unlikely to capture the dynamics of the Coasean world.
Finally, Posin is on to something when he suggests that rents are an essential part of the Coase Theorem (although rents are not essential). After examining how Posin erred, I will attempt to make a silk purse out of this fallen pig by discussing several features of the Coase Theorem that Posin's example touches on, particularly the necessity for rents in the Coase Theorem.
Schwab, Stewart J., "Coase, Rents, and Opportunity Costs" (1991). Cornell Law Faculty Publications. 536.
Published in: Wayne Law Review, vol. 38, no. 1 (Fall 1991).