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The Coase theorem states that with zero transaction costs, private and social costs will be equal and the value of production will be maximized. Absence of transaction costs means the world is a single economic unit. The Coase theorem gives us a good insight into local level problems. Assigning property rights to one of the parties (it does not matter whether it is to the polluter or the pollutee) results in efficient allocation. However, some problems may arise when the theorem is applied on a grander scale, such as in the cases of water pollution, acid rain, even depletion of the ozone layer. When applied on a global scale, although assigning property rights leads to a socially efficient outcome in the absence of transaction costs, the transaction costs at this scale could be so enormous as to outweigh the original externality problem. Some implications are considered.

The principal-agent problem is considered. The full information case is taken as the benchmark and efficient risk allocation with a risk averse principal and risk averse agent is considered, again with full information. Turning to the incomplete information case, unobservable effort raises the key incentive problem. The first order approach is discussed at length and key conditions for sufficiency of the approach examined.

Tax-efficient asset management confronts investors with a traditional asset allocation problem—how much of each asset to hold—and also an asset location problem. The traditional asset allocation problem concerns how much you should put into bonds. But taking account of taxes means having to figure out how much of your bonds you put in tax-deferred accounts versus taxable ones. Taxes also affect asset prices, a fact that can be exploited by a savvy tax-exempt investor.

This chapter articulates the Coase Theorem, which describes how voluntary exchange works when it works perfectly, and considers its implications for both efficient and equitable allocation when conditions are perfect and when they’re not. Distinctions between utility, wealth, and value are developed in relation to the problem of distributional fairness, and transaction costs are introduced as impediments to voluntary exchange, and thus to efficient allocation in markets. Posner extends Coase’s logic to a corollary, that when transaction costs are high, efficiency can only be achieved if rights are granted initially to their highest-valuing owner, and proposes a provocative theory of the judicial role in light of the rule of law and the inevitable subjectivity of justice. This is tested in two cases: a hypothetical case where transaction costs are high, and a real one, involving rights to a significant moment in American history in which they’re low.

This chapter evaluates both the current system and a system based on a Citizen's Income against three further criteria The tax and benefits structure should not disincentivise public goods such as enterprise, training, long-term relationships between the parents of children, and the ability to provide financially for oneself and one's dependents. The tax and benefits structure should incentivise the efficient allocation of resources, and so contribute to an efficient economy. Our tax and benefits structure should treat people with dignity, and not stigmatise individuals involved in any part of the system. The chapter finds that a Citizen's Income ameliorates a number of traps: the unemployment, invalidity, poverty, lone parent, part-time, lack of skills, and savings traps; and so imposes fewer disincentives than the current system on skill acquisition, self-employment, long-term relationships, and the ability to climb out of poverty. It finds that in a number of respects a Citizen's Income would give us a more efficient economy, and that it would enhance individuals’ dignity, because everyone would receive a Citizen's Income, thus reducing stigma.

China’s banks reflect the culture in which they are embedded, extensive borrowing of governance and operating models from West, and the pervasive role of the Communist Party. This accords with the findings of institutional economics approaches to understanding economic and financial institutions. The chapter sets forth the “fragile and facing collapse” thesis of skeptics and counters that the banks have transformed “night and day” from being cashiers of a planned economy to modern and professional banks. They are hybrid in nature, reflecting the market socialist economy they support. Banking system structure is described, with focus on the predominantly state-owned tier 1 banks, which comprise the main subject of the book. The success of China’s banking system must be measured by how well it performs financial intermediation, with systemic stability and sustainability, efficient capital allocation, and provision of financial access.

This chapter first explores the basic environment for society’s need for a media of exchange. It defines the standard Arrow–Debreu model economy and suggests that such a study of media exchange requires a departure from this model, which implies that the economy can achieve a Pareto-efficient allocation without needing factors like money or other financial institutions. The chapter then outlines the ingredients needed in developing a good model of media of exchange. Finally, it lays out the characteristics of the benchmark model that will be used throughout the book.