Coase theorem

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The Coase theorem states that if property rights are well-defined and transaction costs (costs of negotiating) are zero, then the most efficient or Pareto optimal economic activity will occur regardless of who initially owns the property rights. Negotiation and market transactions will ensure optimal allocation of property.

This simple theorem, first published in a 1960 paper [1] by Ronald Coase who won the Nobel Prize for Economics in 1991, has powerful implications for economics, law and even philosophy. The theorem supports conservative interpretations of the Chicago School of Economics.

The implications in law are that the best a judge can do for the economy as a whole is to minimize transaction costs, such as bureaucracy. Court decisions that impose additional procedural obligations, such as Goldberg v. Kelly (1969), can only detract from overall wealth and efficient economic behavior. The Coase theorem implicitly holds that many of the legal attempts to improve the economy are illusory, because there is no way to improve over the combination of clear legal entitlements and no government interference.

The implication in economics is that governments must intervene to lower transaction costs where feasible.

The implications in politics or philosophy are that, in a free society, it is almost irrelevant who has wealth and who does not with respect to economic activity. Useful or desired economic activity will occur regardless of who owns property or wealth. A list of the wealthiest individuals (Forbes 500) is meaningless, as wealth will flow to efficient activity regardless of who controls the money.


Sources:
  1. Ronald H. Coase, “The Problem of Social Cost,” 3 J. Law & Econ. 1 (1960)