Coase theorem

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The Coase theorem () postulates the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem is significant because, if true, it would be possible for private individuals to make choices that can solve the problem of market externalities. The theorem states that if the provision of a good or service results in an externality and trade in that good or service is possible, then bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. A key condition for this outcome is that there are sufficiently low transaction costs in the bargaining and exchange process. This 'theorem' is commonly attributed to Nobel Prize laureate Ronald Coase. In practice, numerous complications, including imperfect information and poorly defined property rights, can prevent this optimal Coasean bargaining solution. In his 1960 paper, Coase specified the ideal conditions under which the theorem could hold and then also argued that...

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