Coase and the Constitution: Reply to MacDonald

Trent J. MacDonald, a research fellow at RMIT University, cites “Coase and the Constitution” on page 86 of The Political Economy of Non-Territorial Exit (Elgar, 2019), a beautiful book that “explores the theoretical possibility of ‘unbundling’ government functions and decentralising territorial governance.” Below is a screenshot of the relevant passage (just click on the passage to see it in its entirety), along with a picture of the book’s cover:

Alas, although MacDonald is correct to note “the transferability of legal rights” and the possibility of transfers of authority between different governmental units, his focus is on the ability of people to “vote with their feet” (so to speak) by moving to those cities and states whose public policies they prefer. The fatal flaw with this observation, however, is that it ignores what Coase’s disciples like to call “transaction costs.” To the point: moving from one place to another is not costless, so many people will, in fact, stay put even if they don’t like the government policies of the place where they live.

Moreover, putting the transacation-cost problem aside, MacDonald — like Sundquist; see my previous post — is talking about markets in a metaphorical sense, whereas my Coase paper proposes an actual “federalism market” in which various governmental units and private firms would compete with each other to purchase the right to provide a particular public good or for the right to enact their own preferred policies and legal rules for a specific sector of the economy. I explain how this market would work in my Coase paper, but so far, it looks like I don’t have any takers …

About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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