A Key to Coase’s Thought: The Notion of Cost

The use of Ronald Coase’s early reflections on cost during the 1930s as a key to read some of his main works brings to light one neglected aspect of the nature and origin of his novel approach. I shall show what his theoretical insights owe to his taking into account the subjectivity of decision-making and to his definition of the cost associated to choice as an opportunity cost. First, I shall bring to light two dimensions of the notion of cost that Coase developed in 1938: a cost is an opportunity cost and it is subjective. Then I shall show that both these dimensions pervade his main theoretical insights, and do so in two directions. On the one hand, his insistence on the subjective aspects of the choice of the businessman fuels his works on the theory of the firm, especially on the monopolist’s choice (1937a) and the choice between make and buy (1937b). On the other hand, the importance of reasoning in terms of opportunity cost shapes his criticisms of standard economic policies, such as marginal cost pricing for natural monopolies (1946b) or policies aimed at equalizing private cost and social cost (1960). Coase progressively abandoned the subjective dimension of his analysis, an evolution for which I provide some elements of explanation