Coase Theorem

The Coase theorem states that when property rights are well-defined and transaction costs are zero, parties will negotiate to an efficient allocation of resources regardless of the initial assignment of rights. Proposed by Ronald Coase in 1960, it implies that externalities can be resolved by private bargaining without government intervention — a conclusion so theoretically clean that its real significance lies in what happens when its conditions fail. Since transaction costs are never zero and property rights are rarely well-defined for environmental and social goods, the theorem functions less as a policy prescription and more as a diagnostic instrument: it tells you precisely what must be in place for private negotiation to work, which is a specification of where collective action becomes necessary. A theorem whose conditions are never met is not a theorem about the world — it is a theorem about what the world would need to be.