Coase Theorem

Dictionary Says

Definition of 'Coase Theorem '

A legal and economic theory that affirms that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution will be selected, regardless of how property rights are divided. Coase theorem asserts that when property rights are involved, parties naturally gravitate toward the most efficient and mutually beneficial outcome.

Investopedia Says

Investopedia explains 'Coase Theorem '

The Coase theorem states that where there is a conflict of property rights, the involved parties can bargain or negotiate terms that are more beneficial to both parties than the outcome of any assigned property rights. The theorem also asserts that in order for this to occur, bargaining must be costless; if there are costs associated with bargaining (such as meetings or enforcement), it will affect the outcome. The Coase theorem shows that where property rights are concerned, involved parties do not necessarily consider how the property rights are granted if they can trade to produce a mutually advantageous outcome. 

This theorem was developed by Ronald Coase when considering the regulation of radio frequencies. He posited that regulating frequencies was not required because stations with the most to gain by broadcasting on a particular frequency would have an incentive to pay other broadcasters not to interfere.

Sign Up For Term of the Day!

Try Our Stock Simulator!

Test your trading skills!

Related Definitions

  1. Alfred Nobel

    The man after ...
  2. Economist

    An expert who ...
  3. Economics

    A social science ...
  4. Marginal Social Cost - MSC

    The total cost ...
  5. Ronald H. Coase

    A British ...
  6. Property Rights

    Laws created by ...
  7. Boom

    A period of time ...
  8. Industry

    A classification ...
  9. Prisoner's Dilemma

    A paradox in ...
  10. Price Risk

    The risk of a ...

Articles Of Interest

  1. How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  2. The Austrian School Of Economics

    If you think economists are only concerned with numbers, check out this group, who are more like economic philosophers.
  3. Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  4. Adam Smith: The Father Of Economics

    This free thinker promoted free trade at a time when governments controlled most commercial interests.
  5. Why Can't Economists Agree?

    There are many reasons why economists can be given the same data and come up with entirely different conclusions.
  6. Should You Invest Your Entire Portfolio In Stocks?

    It is true that stocks outperform bonds and cash in the long run, but that statistic doesn't tell the whole story.
  7. The Uses And Limits Of Volatility

    Check out how the assumptions of theoretical risk models compare to actual market performance.
  8. Risk Tolerance Only Tells Half The Story

    Just because you're willing to accept a risk, doesn't mean you always should.
  9. 5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  10. Invest Like A Pro

    By following the strategies of the pros, even a beginner can learn to invest like an expert.

comments powered by Disqus
Recommended
Loading, please wait...
Trading Center