Coase Theorem


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.

BREAKING DOWN '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.

  1. Ronald H. Coase

    A British economist who won the 1991 Nobel Memorial Prize in ...
  2. Alfred Nobel

    The man after whom the Nobel Prize is named. Nobel, born in 1833 ...
  3. Economist

    An expert who studies the relationship between a society's resources ...
  4. Property Rights

    Laws created by governments in regards to how individuals can ...
  5. Marginal Social Cost - MSC

    The total cost to society as a whole for producing one further ...
  6. Economics

    A social science that studies how individuals, governments, firms ...
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