The problem of social cost: the role of the state

This essay presents a theory of the State as derived from the writings of Coase, Stigler, and Smith. It argues that the state may find a role in (1) lowering the level of transactions costs; and (2) redistributing property rights given the level of non-zero transactions costs. These tenets suggest an explanation for the secular growth of government. Also, alternative to the Marshallian theory of differing marginal utilities of a dollar of income, the essay offers a more general theory of redistribution in a way consistent with Coase's (1992) concept of a transactionscost-based, more general, price theory. Ronald H. Coase won the Nobel Prize in 1991 primarily because of the following simple notion that he put forth in ``The problem of social cost'' (Coase, 1988). If the transactions of exchanging property rights are zero, then efficient allocations will occur regardless of the initial distribution of property rights. As liability is a dimension of property rights, a corollary implies that the initial distribution of liability likewise has no deterrent effect on allocating resources efficiently. With positive transactions cost, the ``Coase theorem'' says that the initial distribution of property rights including liability can affect the allocation of resources. This implies that some re-distributor, such as the government may be able to achieve a more efficient allocation of resources by reassigning property rights or liability. The Coase theorem presents two fundamental efficiency roles that the state, or governing corporate body, may fulfil: (1) lowering the level of transactions costs, such as through the establishment of a system of socio-economic contract law or a set of social mores under which the economic exchange may take place more easily; and (2) redistributing property rights given the level of non-zero transactions