Ronald Coase, reciprocal harms, and opportunity cost

Picking up where we last left off, I had identified another possible source of Ronald Coase’s counter-intuitive reciprocal-harm model at the end of my previous post: what economists and historians of economic thought call the “LSE tradition in cost theory,” an approach to economics that was developed by Lionel Robbins and F. A. Hayek at the London School of Economics in the 1930s. What is this LSE tradition, and how did it influence Coase’s own thinking? In brief, both Robbins and Hayek had rejected the classical British view that cost is an objective or measurable physical quantity, such as labor hours or material units. Instead, they adopted a psychological, forward-looking “opportunity cost” approach to economics. Under this “opportunity cost” approach to economics, the true cost of any choice is not a historical tally of resources spent, but the subjective value of the next best alternative foregone at the moment of decision. (For further information, see the late Jim Buchanan’s…