The Coase Theorem and Arthur Cecil Pigou

In The Problem of Social Cost, Ronald Coase was highly critical of the work of Cambridge University Economics Professor Arthur Cecil Pigou, presenting him as a radical government interventionist. In later work, Coase’s critique of Pigou became even more strident. In fact, however, Pigou’s Economics of Welfare created the basic tools, including the transaction costs model, that Coase’s later work employed. Much of what we today characterize as the Coase Theorem was either stated or anticipated in Pigou’s work. Further, Coase’s extreme faith in private bargaining blinded him to the problems of bargaining in two-person markets that Pigou saw quite clearly and that remain with us to this day.