What is coase theorem?

Answer 1

Coase theorem Informal theorem due to University of Chicago economist and Nobel prizewinner Ronald Coase. It states that if there are zero transaction costs, the socially efficient outcome will occur regardless of legal entitlement. In other words if rights can be bought and sold rational agents will trade them for money in such a way as to maximize returns. In jurisprudence as influenced by economics, this can be used to argue that rights should be allocated to those willing to pay the highest price for them. The implication is taken to be that the market can take care of matters such as the costs to be borne by businesses that harm the environment.

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Answer 2

The Coase theorem is the proposition that if private parties can bargain without cost over allocation of resources, they can solve the problem of exteralities on their own. Perhaps better said, regardless of the initial distribution of rights, the interested parties can always reach a bargain in which everyone is better off and the outcome is efficient. As an example, if the value of peace and quiet exceeds the value of owning a barking dog, the party desiring quiet will buy the right quiet from the dog owner and remove the dog or the dog owner will fail to buy the right to own a barking dog from the owner of quiet space. Regardless of whether one has the property right to peace and quiet or the other has the right to make noise, there is no barking dog, which in this case is efficient. The result is the opposite and is also efficient if the value of owning a dog exceeds the value of peace and quiet.