Coase Theorem

AAA

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 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.

RELATED TERMS
  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. Economics

    A social science that studies how individuals, governments, firms ...
  6. Marginal Social Cost - MSC

    The total cost to society as a whole for producing one further ...
Related Articles
  1. How Influential Economists Changed Our ...
    Fundamental Analysis

    How Influential Economists Changed Our ...

  2. The Austrian School Of Economics
    Economics

    The Austrian School Of Economics

  3. Adam Smith: The Father Of Economics
    Economics

    Adam Smith: The Father Of Economics

  4. Why Can't Economists Agree?
    Economics

    Why Can't Economists Agree?

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center