What Is the Coase Theorem?

Coase's theorem means that under certain conditions, the externalities or inefficiencies of the economy can be corrected through negotiations between the parties to maximize social benefits.

Coase Theorem

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Just like the frictionless plane in physics, the costless transaction is just the result of a logical reasoning, which does not exist in real life. After noticing this, according to

Assume that there are five households around a factory. The smoke from the factory's chimneys will cost US $ 75 per household because of the pollution of the clothes drying in the outdoors, and the total cost of the five households will be US $ 375. There are three ways to solve this problem: one is to install a dust cover on the chimney of the factory, which costs $ 150; the second is that each household has a dust collector, the price of the dust collector is 50 yuan, and the total cost is 250 dollars; One is a USD 75 compensation for each household. The compensation party is the factory or the residents themselves. Assume that the cost of reaching a certain agreement between 5 households, and between households and factories is zero, that is,

Regardless of the initial allocation of rights, farmers and the railway sector are happy to continue the exchange of rights as long as such transactions are profitable. As with ordinary goods, the benefits of a legal rights transaction are not lost until each right is obtained by the party who considers it the most valuable. Therefore, if farmers have the right to be free from the suffering of Mars, and the right to splash Mars is more important to the railway sector than farmers who have the right to be free from the suffering of Mars, then the farmers' rights to sell to the railway sector will benefit both parties. When rights are effectively allocated, then the potential benefits of transactions are lost. Therefore, when the market is functioning normally, the balanced distribution of legal rights is efficient.

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Look at the third note. According to the "perfect competition theory", if the condition of perfect competition in the legal rights trading market is satisfied, the balanced distribution of legal rights will be efficient. In the example of the railway sector and farmers, there is only one railway, so the market is characterized by monopoly, not perfect competition. In addition, there are other manifestations that do not qualify for perfect competition. For example, farmers may be more aware of the damage caused to Mars than the railway sector, and the railway sector is more aware of the technology to reduce Mars than farmers. In light of these facts, the exchange of legal rights between farmers and the railway sector will be far from an exchange under perfect competition, so the market may not be able to correct the inefficiencies in the initial distribution of legal rights.

Of course, from the perspective of income distribution, the initial distribution of rights has always been important. Because if efficiency requires the railway sector to be free from the injunction, then giving farmers the right to waive the prohibition to compensate them will prompt the railway sector to purchase this right. The deal is expenditures by the railway sector and farmers' income. Conversely, granting the railway sector the right to impunity would save it the expense of purchasing this right and deprive farmers of the income from selling this right. Just like scarce resources, scarce legislative rights are valuable.

American economist born in the UK

According to Western scholars,

Mathematical proof of Coase's theorem

No matter how much Coase's theory has done, anyway, he challenges the generally accepted financial view. Prior to his dissertation, few people noticed the possibility of externalities being addressed through private agreements. Therefore, Coase's claim touched the core of a major controversy in economics. In addition, the publication of Coase's dissertation can be seen as a breakthrough in what became known as "law and economics". Prior to the publication of the Coase thesis, economic analysisas opposed to economic thoughtwas not applied to customary law, and in the teaching of law schools, customary law was at the center of legal theory and method. Coase analyzes the case of property law with the attitude of a jurist, but guides this analysis with microeconomic theories. His research proves that the economic analysis of customary law has yielded fruitful results. Although he did not use the tool of mathematics (20 years later, the use of this tool became a characteristic of studying this subject), but he inspired a generation of scholars who became pioneers in the analysis of law and economics.