Social Cost and Public Administration

In the “The Problem of Social Cost” Ronald Coase presents an alternative solution to reduce expenses and achieve optimal outcomes.

Common sense argues that taxes and penalties are the most effective ways to address conflicts over resources. Putting it simple, the party that has caused harmful effects should pay for damage caused against another party.

Coase argues that solutions for conflicts must be figured out exclusively by players involved in the litigation and not by third parties, like the State while creating convoluted regulations in an attempt to determine appropriate behaviors, liabilities, and punishments.

Coases states that a more desirable solution derives from the elimination of externalities. To effectively allocate resources and guarantee the achievement of optimal results from contracts signed, litigants are encouraged to engage in negotiation processes regulated by price mechanisms.

In other words, a mutual satisfactory agreement tends to produce better results than externalities imposing and regulating procedures and behaviors.

Public administrators, in this context, ought to ask themselves when externalities actually counterbalance power between distinctive negotiators and when red tape prevents scarce resources from being allocated efficiently and optimal results achieved.

Answering correctly these questions can dramatically reduce costs related to social issues and, ultimately, improve overall welfare.