Home > Coase theorem
In law and economics, the Coase theorem, attributed to Ronald Coase, is a theorem relating to the economic efficiency of a government's allocation of property rights. In essence, the theorem states that in the absence of transaction costs, all government allocations of property are equally efficient, because interested parties will bargain privately to correct any externality. As a corollary, the theorem also implies that in the presence of transaction costs, government may minimize inefficiency by allocating property initially to the party assigning it the greatest utility. This theorem, which earned Coase the Nobel Prize in 1991, is an important basis for most modern economic analyses of government regulation.What Coase originally proposed in 1959 in the context of the regulation of radio frequenciesRF can also denote rheumatoid factor Radio frequency or RF refers to that portion of the electromagnetic spectrum in which electromagnetic waves can be generated by alternating current fed to an antenna. Such frequencies account for the following parts of was that as long as property rights in these frequencies were well defined, it ultimately did not matter if adjacent radio stationA radio station is a site configured for broadcasting sound. Traditionally, radio stations have broadcast through the air via radio waves (a form of electromagnetic radiation), sent through a transmitter and antenna. Today, many if not most stations broads would initially interfere with each other by broadcasting in the same frequency band. The station able to reap the higher economic gain of the two from broadcasting would in this case have an incentiveIn economics, an incentive in anything that provides a motive for a particular course of action — that counts as a reason for preferring one choice to the alternatives. Since human beings are purposeful creatures, the study of incentive structures is cent to pay the other station not to interfere. In the absence of transaction costs, both stations would strike a mutually advantageous deal. Put differently, it would not matter whether one or the other station had the initial right to broadcast; eventually, the right to broadcast would end up with the party that was able to put it to the most profitable use.
Coase's main point, clarified in an article published in 1960Events January-February January 1 Independence of Cameroon January 9 Aswan High Dam construction begins in Egypt January 11 Chad declares its independence. January 14 Ralph Chubb, the gay poet and printer, dies at Fair Oak Cottage in Hampshire. January 23 (Coase 1960) and cited when he was awarded the Nobel Prize in 1991, was that transaction costs, however, could not be neglected, and that therefore, the initial allocation of property rights mattered in the presence of side effects (externalities).
George Stigler summarised the resolution of the externality problem in the absence of transaction costs in a 1966Events January January 1 In a coup, Colonel Jean-Bedel Bokassa ousts president David Dacko and takes over the Central African Republic. January 2 Strike of public transportation workers in New York City ends January 13 January 3 First Acid Test at the Fil economics textbook in terms of private and social cost, and for the first time called it a "theorem". Nevertheless, since the 1960s, a voluminous literature on the Coase theorem and its various interpretations, proofs, and refutations, has developed that continues to grow.
References
Law and economics
