The Coase Theorem Says That as Long as Property Rights Are Clearly Defined, Externalities Do Not Matter
The Coase Theorem ' as it has become known, was propounded by Ronald Coase of the University of Chicago and deals with a hypothetical world of zero transaction costs. His aim in so doing was "not to describe what life would be like in such a world but to provide a simple setting in which to develop the analysis and, what was even more important, to make clear the fundamental role which transaction costs do, and should, play in the fashioning of the institutions which make up the economic system." A zero transaction cost world does of course have very peculiar properties, such that one of Coase 's own conclusions was that, in such a world, the law does not matter. People would always be able to negotiate without cost to acquire, subdivide and combine rights whenever this would increase the value of production and so a legal framework is unnecessary. However, a world of zero transaction costs does not exist and Coase tried to use the argument to suggest the need to introduce positive transaction costs explicitly into economic analysis so that the real world could be better studied by economists. Whether he has been successful in this aim is debatable, however, what is certain is that many lawyers (particularly property lawyers) have applauded his analysis and theorem ' as it states that the law should determine the level of transaction costs and react accordingly. Instead of determining a legal outcome through causes and fairness, the Coase Theorem encourages legal analysis in terms of efficiency.
The Coase Theorem is best described with an example as Coase did in his original paper. A cattle rancher lives beside a crop farmer. The farmer grows corn on some of his land and leaves some uncultivated. The rancher runs cattle over all of her land. The boundary between the rancher and the farmer is clear but is unfenced and so from time to time, the cattle wander over the boundary and cause damage to the farmer 's crops. There are a variety of ways of reducing the
The Coase Theorem is best described with an example as Coase did in his original paper. A cattle rancher lives beside a crop farmer. The farmer grows corn on some of his land and leaves some uncultivated. The rancher runs cattle over all of her land. The boundary between the rancher and the farmer is clear but is unfenced and so from time to time, the cattle wander over the boundary and cause damage to the farmer 's crops. There are a variety of ways of reducing the
Bibliography: • Cooter R and Ulen T, Law & Economics, 2000 • Coase R, The Firm, the Market and the Law, 1988 • Dahlman C, The Problem of Externality, 1979