The problem of social cost: the role of the state

This essay presents a theory of the State as derived from the writings of Coase, Stigler, and Smith. It argues that the state may find a role in (1) lowering the level of transactions costs; and (2) redistributing property rights given the level of non‐zero transactions costs. These tenets suggest an explanation for the secular growth of government. Also, alternative to the Marshallian theory of differing marginal utilities of a dollar of income, the essay offers a more general theory of redistribution in a way consistent with Coase’s (1992) concept of a transactions‐cost‐based, more general, price theory.