The Relevance of the Coase Theorem (Essay Sample)

Law and Economics
Student's name
Institution
To begin with, various problems; economic, political or social problems are normally experienced in the society. These problems are caused by various factors which end up affect people in various ways. Among the problems is the issue of negative externality that is experienced when one's actions affects another negatively (Coase, 1960). For instance, a coal power plant may affect the health of those living around the power plant and this is referred to as negative externality.
Coarse theorem provides that, where an externality occurs, there have to be a negotiation between the parties involved. This is to compensate the individual that is negatively affected. It is a way of compensating him or her for the loss experienced due to the other person's actions. The Article, the problem of social costs simply talks about how firms or individuals need to sacrifice their activities in the extent of minimizing the cost they incur as a result of imposing negative externalities to other individuals or firms (Coase, 1960).
The article uses an example of a scenario where there is straying cattle that destroys crops which are grown in a nearby land. From this example, it is provided that the cattle owner posses an obligation of compensating the farmer whose crops are destroyed. However, there is a challenge in that both the two individuals seem to be negatively affected their actions/. For instance, if the cattle owner has to take into account the effects of his cattle on the neighbor's crops, it means that he has to reduce the number of cattle so as to minimize the damage caused to his neighbor (Coase, 1960). Reducing the number of cattle mean that the profit made from his business will reduce and so negatively affecting his businesses.
Given the rational nature of human beings, no one will be free willingly to lose because of the other. Everyone is working towards maximizing his or her profit and so it is hard for one to compensate another for damages caused from his business. This therefore, calls for government intervention. It is here when the government has to intervene so as to allocate these costs equally to each individual. The government does this through imposition of taxation. Under this, individuals pay taxes through the government agencies (Coase, 1960). These taxes are charged according to the type and size of business performed.
A business that imposes large negative externalities will therefore be charged higher taxes so as to discourage them from pol