Coase Theorem

The Coase theorem is a proposition concerning the economic theory of externalities. The proposition states that under a regime of zero transaction costs, market forces will efficiently allocate legal rights (e.g., the right to pollute vs. the right to breathe clean air), and moreover, the efficient outcome will not depend on the initial assignment of legal rights. That is, even if legal rights are initially misallocated, this misallocation will be corrected by market forces. The proposition, although not the theorem name itself, was introduced by Ronald H. Coase in his 1959 article “The Federal Communications Commission” and elaborated on in his 1960 article “The Problem of Social Cost.” The proposition acquired theorem status when the label was applied by economist George Stigler to summarize the ...