Course

Coase Theorem

Instructor: Alex Tabarrok, George Mason University

Coase theorem : The principle that if there are no transaction costs and property rights are clearly delineated, private bargains will ensure an efficient market

Coase theorem: The principle that if there are no transaction costs and property rights are clearly delineated, private bargains will ensure an efficient market equilibrium even in the face of externalities. This is from the video “The Coase Theorem” in the Principles of Microeconomics course.

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Transcript

So, the conclusion here is that the market can be efficient even when there are externalities - when transactions costs are low and when property rights are clearly defined. And in fact, that's the Coase Theorem. If transactions costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even if there are externalities. The conditions for the Coase Theorem to be met, low transactions costs and clear property rights, are in practice often not met. Even so, however, the theorem does suggest an alternative approach to externalities.


We've already looked at the Pigouvian taxes and subsidies, and, command, and control. The Coase Theorem suggests another solution, namely the creation of new markets. If the government can define property rights and reduce transactions costs, then markets can be used to control externality problems.

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