Town Planning Review

'The Problem of Social Cost': the Coase theorem and externality explained: Using simple diagrams and examples to illustrate the role of land use planning in tackling externalities

Town Planning Review (2007), 78, (3), 335–368.

Abstract

This paper seeks, with the help of simple conceptual drawings common in the fields of economics and planning, to (a) survey the evolution of the Coase theorem; (b) offer a logical account of the relationship between the farming examples in Coase's 'The Problem of Social Cost', the Coase theorem, and Pigou's concept of externality in The Economics of Welfare; and (c) to examine the relevance or otherwise of the Coase theorem and classic examples, hypothetical and real, used by economic and planning researchers for land use planning to deal with externalities. The paper concludes with a discussion on the relevance of Pigou's air pollution example in light of its treatment by key libertarian economists and the role of examples as a means of articulation in research and policy formulation.

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Lai, Lawrence Wai-chung