Ronald Coase's 1960 classic article, "The Problem of Social Cost," deals with the

divergence of private and social costs. The classic example of this is when an

activity conducted by A creates an uncompensated cost to B. This might occur

when A's factory s deposits pollution on B. Coase objected to the standard

Pigovian solution of requiring A to compensate B ("polluter pays"). Coase's

solution involved:

a. Recognizing that to avoid harm to B is to harm A

b. Analyzing the total costs of the transaction; is the reduction in output by A

worth more or less than the pollution cost borne by B

c. Observing that if the parties were free to costlessly negotiate and contract,

bargaining would result in the efficient solution

d. Determining that the outcome described in c (above) would obtain

regardless of which party was liable for the damage

e. All of the above