Coase Theorem

Loading the player...

What is 'Coase Theorem '

Coase theorem is 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.

RELATED TERMS
  1. Ronald H. Coase

    A British economist who won the 1991 Nobel Memorial Prize in ...
  2. Bayes' Theorem

    A formula for determining conditional probability named after ...
  3. Irrelevance Proposition Theorem

    A theory of corporate capital structure that posits that financial ...
  4. Modigliani-Miller Theorem - M&M

    A financial theory stating that the market value of a firm is ...
  5. Property Rights

    Laws created by governments in regards to how individuals can ...
  6. Bundle Of Rights

    A set of legal rights afforded to the real estate title holder. ...
Related Articles
  1. Investing Basics

    Understanding the Modigliani-Miller Theorem

    The Modigliani-Miller (M&M) theorem is used in financial and economic studies to analyze the value of a firm, such as a business or a corporation.
  2. Fundamental Analysis

    Explaining the Central Limit Theorem

    Central limit theorem is a fundamental concept in probability theory.
  3. Investing Basics

    Redefining Investor Risk

    Changing the way you think about time and risk can change the way you invest.
  4. Retirement

    State Laws Dictate Division Of Joint Property

    In breakup, divorce or death, community or common law will determine how property is divided.
  5. Options & Futures

    Use Real Estate To Put Off Tax Bills

    Find out how you can build wealth and reduce your taxes.
  6. Active Trading

    Trade Properties To Keep The Taxman At Bay

    Like-kind exchanges can mean a much lower tax bill on real estate for savvy investors.
  7. Home & Auto

    Investing In Foreclosures Not A Get-Rich-Quick Venture

    Investing in this kind of real estate takes capital, time and careful planning.
  8. Investing Basics

    Capitalization Rate

    Capitalization Rate is a financial term most commonly used in the real estate investment industry. It is often simply called the Cap Rate.
  9. Taxes

    Getting U.S. Tax Deductions On Foreign Real Estate

    If your home or second home is not in the United States, you can still get U.S. tax deductions. How many and what kind depends on whether you also rent it.
  10. Investing

    How Does Depreciation Reduce My Tax Bill?

    How the depreciation tax rule can assist real estate investors.
RELATED FAQS
  1. What is Fisher's separation theorem?

    Fisher's separation theorem stipulates that the goal of any firm is to increase its value to the fullest extent, regardless ... Read Answer >>
  2. How can individuals or businesses handle transaction costs for economic externalities?

    Find out how businesses can work with each other, their customers or third parties to help internalize external costs or ... Read Answer >>
  3. What is the difference between real estate and real property?

    Understand how real estate is legally different from real property and the implications of that difference for each property ... Read Answer >>
  4. How are capitalism and private property related?

    Read about the relationship between capitalism and private property rights, and learn why voluntary trade would collapse ... Read Answer >>
  5. What criteria does a property need to meet to be considered an 'investment grade' ...

    Learn what it takes for institutional investors to consider a property "investment grade," such as real estate investment ... Read Answer >>
  6. What are the main differences between a mixed economic system and pure capitalism?

    Read about the primary differences between a mixed economic system and a laissez-faire, free market economic system with ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center