Coase theorem

In law and economics, the Coase theorem, attributed to Ronald Coase, relates 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 1991 Bank of Sweden Prize in Economic Sciences, is an important basis for most modern economic analyses of government regulation.

References

• Coase, Ronald H. The Problem of Social Cost. J. Law & Econ. 3, p. 1 (1960).
• A statement and proof of a simple mathematical version of the theorem.