Of Pangloss, Pigouvians and Pragmatism: Ronald Coase and Social Cost Analysis

Steven Medema ()

Journal of the History of Economic Thought, 1996, vol. 18, issue 1, 96-114

Abstract: The laissez-faire welfare theory of classical economics was very much concerned with demonstrating the optimality of the competitive market system, or, more generally, the harmony between individual and social interests. Under the influence of J. S. Mill and Henry Sidgwick, however, this view gradually began to erode. Sidgwick (1901), for example, pointed to a number of factors, including what we now call externalities, that can cause individually-optimal behavior to diverge from the social optimum, and suggested that these potentially call for governmental corrective measures. Alfred Marshall carried this discussion a bit further, but it was through A. C. Pigou's analysis—particularly in The Economics of Welfare (1932)—that the theory of market failure, and the need for government correction of these failures, reached full flower. His work formed the foundation for “modern” welfare economics. The contrast between the “old” and the “modern” welfare economics was pointed out by James Buchanan:

Date: 1996
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