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 owns the property rights. It does not matter who owns the property rights because negotiation will and market transactions will ensure optimal allocation of property.

This simple theorem, first announced in a 1960 paper [1] by Ronald Coase that won the Nobel Prize for Economics in 1991, has powerful implications for economics, law and even philosophy. It is a conservative theorem and thus most schools and professors downplay or distort it. Coase himself was vilified for years by liberals for it.

The implications in law are that the best a judge can do for the economy 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 much 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 implications in economics are 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.

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