The Coase Theorem

Instructor: Alex Tabarrok, George Mason University

In this video, we show how bees and pollination demonstrate the Coase Theorem in action: when transaction costs are low and property rights are clearly defined,

In this video, we show how bees and pollination demonstrate the Coase Theorem in action: when transaction costs are low and property rights are clearly defined, private arrangements ensure that the market works even when there are externalities. Under these conditions, the market properly manages externalities.

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Show 1 Answer (Answer provided by Ion Sterpan)
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Your question is about who should initially own the property right. In other words, who should initially have the right to decide whether the factory pollutes, the factory or the polluter? And who should have initially the right to decide whether Jimmy B. can walk around others and sneeze when sick and without having had a flu shot.
Looking at who saves or makes money is not enough, because there are costs involved on both sides, in both cases. The factory earns profit from not polluting. But so is Jimmy B., who usually gets sick first and puts others in danger: he saved money by not buying the flu shot.
To decide who should initially own the property right we need to see which party makes or saves _more_ money than the other party if that party had the right to decide what happens. We need to ask who values _more_ the right to decide whether the polluting factory pollutes? And who values _more_ the right to decide whether Jimmy can sneeze around when he is sick without having had the shot.
If the factory values it more than bystanders, then the factory. If bystanders, then bystanders. (By factory I mean all investors and all workers, and all people who buy the products of the factory. All these people lose money if the factory does not own the right to decide whether it pollutes or not.) If Jimmy values it more than others, then Jimmy. If bystanders value the right to decide whether Jimmy can walk and sneeze around more than Jimmy, then bystanders should own the initial right. (By Jimmy I mean each of us in our quality as sick people. And by bystanders I mean all of us in our quality as not-yet-sick people, who happen to be around Jimmy.)

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