The Nature of the Firm - Coase

Unfortunately, contemporary economists have failed dramatically to appreciate the subtly of Coase's work.

Coase is famous for his work in showing that in the absence of transaction costs, and assuming an efficient market for a good, the market would equilibrate in a way where the good was allocated to its highest-value uses, regardless of the initial distribution of the good.

The theorem is very often used to justify deregulation and privatization in various areas, and modern economists almost uniformly give short-shrift to the assumptions underlying the theory. From the above-cited paper: "The fact that actions might have harmful effects on others has been shown to be no obstacle to the introduction of property rights. But it was possible to reach this unequivocal result because the conflicts of interest were between individuals. When large numbers of people are involved, the argument for the institution of property rights is weakened and that for general regulations becomes stronger." (Ronald Coase, the Federal Communications Commission at 29).

People may also find Yochai Benkler's 2002 followup applying this sort of analysis to open source software: http://www.benkler.org/CoasesPenguin.html